Lenders mortgage insurance and mortgage protection insurance: What’s the difference?
There’s plenty of jargon you’ll need to wrap your head around when looking to buy a home, and one common source of confusion is the difference between lenders mortgage insurance (LMI) and mortgage protection insurance (MPI). Let’s unpack these terms so you can better understand how these products could help you in your home buying journey.
Definitions
- Lenders mortgage insurance is insurance that protects the lender if you’re no longer able to meet your home loan repayments. You’ll likely be required to pay lenders mortgage insurance if your deposit is less than 20% of the home’s value.
- Mortgage protection insurance is optional insurance that protects you. It’s often sold by lenders or insurance providers, and it can help cover your home loan repayments for a set period if you suffer from a serious illness or injury, are made redundant or if you pass away.
What is mortgage protection insurance?
Mortgage protection insurance is insurance that you (the borrower) can take out to protect yourself if circumstances arise which impact your ability to pay off your home loan, such as:
- Serious illness or injury
- Redundancy
- Death
Mortgage protection insurance is optional and it’s intended to help cover your mortgage if you’re no longer able to work and make repayments – but only for a set period of time. If you pass away, it may cover all of your remaining mortgage, depending on the policy.
What is lenders mortgage insurance?
Lenders mortgage insurance protects the lender from financial loss if you (the borrower) are no longer able to meet your home loan repayments.
While LMI covers the lender, the cost of the insurance is passed on to you. You’ll often need to pay lenders mortgage insurance if your deposit is less than 20% of the home’s value – in other words, you have a loan-to-value ratio (LVR) of 80% or higher.
Lenders mortgage insurance and mortgage protection insurance: what’s the difference?
Who gets covered
The major difference between lenders mortgage insurance and mortgage protection insurance is that LMI covers the insurer, while MPI covers the borrower. Both types of insurance come into effect if you’re no longer able to pay off your home loan.
When it’s required
Lenders mortgage insurance is often mandatory if you’re a borrower with a home loan deposit of less than 20%. It’s generally required in this circumstance because a deposit of under 20% of the home’s value makes you a greater risk in the eyes of the lender.
On the other hand, mortgage protection insurance is entirely optional, and it’s taken out if you want to avoid the risk of defaulting on your home loan if you weren’t able to pay your mortgage for a certain period of time.
How it’s paid for
Lenders mortgage insurance can be paid for in a one-off instalment, but most people will likely opt to add it on to the overall cost of the home loan. It’s worth noting that doing so will increase the overall home loan amount, and therefore you’ll be charged more interest over time.
You may be able to pay for mortgage protection insurance with one upfront payment, but it’s more likely that you’ll pay for this insurance on an annual or monthly basis. Unlike LMI, the cost of mortgage protection will not be added to your home loan and therefore won’t accumulate interest.
What type of insurance is best for home loan protection?
Buying property can be risky, but mortgage insurance policies can help reduce the financial risk for both the borrower and the lender. While it’s impossible to call one policy the ‘best’, if you’re a borrower, the best mortgage protection insurance will fit comfortably into your budget and other needs.
For most healthy people, especially young first home buyers, a life insurance or income protection insurance policy might be best to provide mortgage protection. That way, you get the biggest bang for your buck and can enjoy more comprehensive protection against other unexpected life events.
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