Understanding the difference between Mortgage Insurance and Mortgage Protection Insurance
As a first home buyer, there are a number of things you’ll need to learn fast, like interest rates, First Home Buyers schemes and insurance options. So with the news that two big banks have been accused of selling overpriced mortgage protection policies to confused and inexperienced first home buyers, we thought it was time to clear things up and explain the difference between two similar sounding insurances you might consider for your first home.
They are mortgage protection insurance and lenders mortgage insurance.
Mortgage Protection Insurance FAQs
What is mortgage protection insurance?
Mortgage protection insurance is a type of insurance homeowners can take out when they take out a home loan. It covers the cost of the monthly repayments if the borrower ever defaults on their loan, loses their job or experiences illness, injury or pass away.
One feature of mortgage protection insurance is the amount of cover a borrower could receive depending on the event, they include:
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- Up to $1,000,000 to pay off the loan if the borrower passess away, any money left over will go to the borrower’s estate to be used however they like
- Up to $7,500 a month to cover repayments if a borrower is unable to work due to illness or injury - this may be only be up to 30 days
- Up to $7,500 a month to cover repayments if a borrower becomes unemployed - this may only be up to 90 days
What are the benefits of having mortgage protection insurance?
Like any insurance policy, you’re trying to limit the financial impact on your family if something were to happen to you and could no longer repay the mortgage. For homeowners, having this peace of mind is the big benefit that comes with having mortgage protection insurance.
Are there any drawbacks of having mortgage protection insurance?
Mortgage protection insurance does have a limit on the length of time you’ll receive cover for. For instance, a borrower looking to claim on their mortgage protection insurance due to an unexpected illness may only have cover for up to 30 days.
Something else to consider before taking out mortgage protection insurance is whether you may already have cover for your mortgage repayments in another policy. This could most commonly be found in life insurance or income protection insurance as part of your super, so it might be a good idea to review these policies before signing up.
How much does mortgage protection insurance cost?
The cost of mortgage protection insurance will vary amongst each borrower, however, the cost will be determined based on a number of factors that include:
- The number of names on the policy
- Loan amount
- Your age
- Repayment amount
But when comes to weighing up the cost, it’s up to you to determine whether the price is is something you think is worth it. Say for instance your policy costs $3.50 a day, while this may seem like a minor amount, this totals to $1,277.50 each year.
Will I need to pay any excess on my mortgage protection insurance?
While you won’t have to pay excess, there is something called an excess period - this is the amount of time you’ll wait until your mortgage protection insurance kicks in. While you can choose the period of time, keep in mind that the shorter it is, the higher your premium could be.
Are there any exclusions with mortgage protection insurance?
The type of exclusions in your policy will depend on the insurer, so it’s important that you read the Product Disclosure Statement (PDS) for any conditions that might stop you from getting cover, like pre-existing medical conditions, eligible illnesses or disabilities as well as any other exclusions.
Can I take out mortgage protection insurance with another lender?
This will depend on your home loan lender. Many lenders offer policies exclusively to their customers, like ANZ, while other lenders such as Westpac offer them to all mortgage holders.
Lenders Mortgage Insurance (LMI) FAQs
What is lender's mortgage insurance?
Lenders Mortgage Insurance (LMI) is one-off payment that borrowers who don’t have a deposit of 20% or more pay to protect the lender if they were to default on their loan.
How much does LMI cost?
Similar to Mortgage Protection Insurance, the cost of Lenders Mortgage Insurance is determined by a number of factors, they are:
- The size of your home loan
- The loan type - this refers to whether the property is an investment or to live in
- Your deposit amount
- Your employment status
How do I pay for Lenders Mortgage Insurance?
LMI is typically paid at the loan settlement and is usually added onto the loan amount.
Is mortgage insurance transferable?
Unfortunately, no. If you decide to refinance their home loan in the future by moving to a better deal and the loan to value ratio (LVR) is still higher than 80%, you will have to pay the premium again.
Are there any benefits in paying mortgage insurance?
While Mortgage Insurance exists to cover the lender, not you, it can be a way for first homebuyers to break into the property market without the need for a 20% deposit.
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