Insuring your Mortgage
With interest rates predicted to rise again this year, you may want to consider taking out mortgage insurance for protection against financial difficulty.
Should you suffer an illness or injury, Mortgage Protection Insurance will cover your mortgage repayments for a prolonged period, allowing you to concentrate on getting better or re-entering the workforce.
Your mortgage is paid out in the event of death or permanent disability. The amount of cover is determined by the amount of your loan and loan repayments, and you generally have the choice of opting to cover the loan amount either in the event of death or inability to work, or both.
Keep in mind that mortgage protection insurance will provide protection for your mortgage, but you will need to also take out life insurance and/or income protection to cover yourself against other financial commitments like ongoing income and medical expenses.
Some insurance companies have mortgage protection insurance policies available to cover your mortgage for a certain period if you are made redundant, but these are hard to find and can be expensive.
When you consider that mortgages usually extend to 20 years or more, it is a long period of time to not suffer a brush with illness or injury. Having these insurances in place gives you the peace of mind of not needing to worry about the prospect of losing your family home.
Is mortgage insurance similar to lenders mortgage insurance?
Don't confuse mortgage protection insurance with lenders mortgage insurance (LMI) - they are two very different products. One is mortgage protection for the borrower, while LMI protects the lender in case the borrower defaults on their loan.
LMI is a requirement by lenders where borrowers don't have a deposit of more than 20 per cent for the property. It allows lenders to protect themselves against loss should a borrower default on their loan and the money raised from selling the house fails to cover the debt. If this happens, the lender is entitled to make an insurance claim to the LMI provider for the amount outstanding.
What's in the fine print?
When taking out any mortgage related insurance, make sure you are comfortable with the details of the policy before you sign on the dotted line. Look for answers to questions like:
- How long will a claim be paid for?
- How long is the policy term?
- What are the eligibility criteria? (e.g., what illnesses does the policy cover)
- For what period do you have to wait before a benefit is paid?