Lender’s Mortgage Insurance and Mortgage Protection Insurance: What’s the difference?
As a first home buyer, there’s plenty of jargon you’ll need to get your head around. One of the most common sources of confusion is the difference between mortgage protection insurance and lenders mortgage insurance. Below, we answer a few questions you might have about each.
Mortgage Protection Insurance FAQs
What is mortgage protection insurance?
Mortgage protection insurance is a type of insurance a borrower can take out when they sign up for a home loan. It covers the cost of the monthly repayments if the borrower loses their job, suffers illness or injury, or passes away.
The amount of cover a borrower will receive will vary depending on the policy and the event. For example, a typical policy might provide:
- Up to $1,000,000 to pay off the loan if the borrower passes 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, mortgage protection insurance helps to minimise the financial impact on your family if something happens to you. Knowing you won’t fall too far behind with your repayments if your finances take a hit can offer significant peace of mind.
Are there any drawbacks of having mortgage protection insurance?
Mortgage protection insurance comes with a limit on the length of time you’ll receive cover. 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 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 for different borrowers. Generally, an insurance provider will look at the following when determining how much you’ll pay:
- The number of names on the policy
- The loan amount
- Your age
- The 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 insurance provider. Be sure to read the Product Disclosure Statement (PDS) for any conditions that might see you denied cover, such as pre-existing medical conditions.
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 (owner occupier or investor)
- 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 your 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 covers the lender, not you, it can be a way for first homebuyers to break into the property market without having the requisite 20% deposit.
Source: Mozo
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