Mortgage Insurance – What’s the Point?
Common types of insurance for investment properties include: building insurance, contents cover, and even landlords cover, but why do so many mortgage holders have their heads in the sand when it comes to mortgage insurance to protect their assets?
Huy Trong of ALI Group believes Australians have a “she’ll be right, mate” attitude about job loss, serious illness or death. They’d rather think optimistically than face the fact that it could happen to them.
He points out that “83% of car owners have motor vehicle insurance. 71% have contents insurance. Yet, only 11% of mortgage holders, aged 20-49, have any form of loan protection should their income suddenly stop because of serious illness or injury.”
What is mortgage insurance?
Unlike Lenders Mortgage Insurance (LMI), which protects the lender against you defaulting on your loan, mortgage insurance protects you, the borrower. It effectively bails you out by covering your mortgage payments if you lose your job, become ill or disabled, or in the event of your death.
It can be a lifeline if you’re suffering from illness or an accident and need to undergo treatment as it takes away the stress and hassle of meeting home loan repayments. You can keep your assets safe and even continue to build your wealth should you be affected by unforeseen events.
Pros and cons of mortgage insurance
As with any kind of insurance product, it’s important to weigh up the pros and cons to decide whether it’s right for you.
Here are some to think about when considering mortgage insurance:
Pros of mortgage insurance
- Gives you peace of mind that your assets are protected from loan default
- Avoid using your own money to make mortgage payments once insurance event has occurred
- Pays off your home in a lump sum if you pass away
- Can be tailored to safeguard yourself against financial losses.
Cons of mortgage insurance
- It’s an additional expense to budget for
- Your premiums remain the same even though your mortgage goes down.
When is mortgage insurance not a good idea
A mortgage is a long-term financial commitment, so if you’re at all unsure about your ability to meet repayments, then the additional premium payments are worth it to have ongoing peace of mind.
However, there are a couple of scenarios where mortgage insurance may not be worth it.
- If you own your primary home outright and have a small mortgage on your rental investment.
- If you have a comfortable nest egg stashed away in case of job loss/tenant rent default.
But if you have health issues or a job that’s not particularly steady, then you may want to shop around for mortgage insurance or ask your mortgage broker for advice about what products are available.