Buying a property with a home loan is a significant step. But what happens if you were suddenly unable to make your monthly payments due to loss of employment or an illness?
Mortgage protection insurance (MPI) serves as a safety net for homeowners, protecting you against unforeseen circumstances that may prevent you from keeping up with your monthly mortgage payments.
What is mortgage protection insurance?
MPI offers the borrower financial protection. The insurance helps cover home loan repayments in situations where you are unable to for a period of time. This can include:
- Involuntary redundancy: Insurers may provide regular payments until you find more work.
- Illness or serious injury that prevents you from working: Insurers may cover your home loan repayments while you recover.
- Death or terminal illness: You or your beneficiary may receive a payout to help pay off the home loan. Generally, in this case, the insurer will pay out a lump sum rather than individual, regular payments.
MPI is not compulsory. However, if you are looking for some protection for you or your loved ones in case of unforeseen circumstances in which you or they are left without income, it can be a good option.
How much does mortgage protection insurance cost?
The cost of MPI will vary according to you and your insurer. It is recommended you speak to a finance broker in Sydney who can guide you through the home loan and insurance options.
A finance broker can offer you expertise in the diverse range of insurance options available, including MPI. They can help you understand the terms, coverage and benefits of MPI policies.
How is the MPI premium determined?
The cost of MPI will vary according to different factors, including:
- Whether this is a single or joint policy: If you are taking out the insurance alone, only your income will be included in calculations. But, if you are taking out the insurance with a partner who also owns the home, both incomes will be considered. You will also be covered for different amounts, depending on your income.
- The size of your loan: How much you owe on your home loan, as well as the value of the property, will be considered when calculating the premium. Typically, the more you owe, the higher your premiums will be.
- Your age: Insurers will take into account how old you are and possibly your overall health as well.
- Your employment type: Some jobs are considered riskier than others so an insurer might take that into account when determining your premiums
What are the pros and cons of MPI?
Pros
- Provides protection for your home, which is a major asset
- Gives you peace of mind for your home loan repayments
- Offers flexible policy options for coverage and premiums
Cons
- Adds an additional cost
- Restricts or limits when and how it will pay out
- Covers only home loan repayments, not other expenses
What should you consider when taking out MPI?
If you are interested in taking out MPI to protect your home loan, here are some aspects you should consider:
Cost
Consider whether you can afford the additional cost of the premium. Speak to your finance broker in Sydney about getting different quotes to compare.
Beneficiaries
When choosing who to name as beneficiaries, consider their age and situation as well. If you have a young family who may struggle if they have to take on a home loan, consider higher coverage.
Payout
Before taking out MPI, consider your overall finances and the insurance terms. This is particularly important when planning how, if necessary, the MPI will cover you in the event of job loss. You may need to consider additional insurance to assist with other expenses during that time.
Waiting period
Some lenders may insist on a waiting period before paying out. This can be a challenge if you have suddenly lost income and have no other savings to cover your home loan in the meantime.
What alternatives are there for MPI?
If you feel MPI might not be right for you, speak to your finance broker in Sydney about what alternatives are available. These can include:
Life insurance
Also known as death cover, this will pay out to your beneficiaries in the case of your death, allowing them to pay towards your home loan if they wish.
Income protection
In the event that you lose your income to illness or injury, income protection will cover you. The payouts can be used to cover other expenses as well as home loans.
Total permanent disability cover
This provides you with a lump sum for permanent loss of work if you become seriously ill or injured. It is sometimes included in other life insurances.
Mortgage facilities
A redraw facility in your home loan allows you to pay extra into your mortgage each month and then access this money if you need to in an emergency.
What is lender’s mortgage insurance?
Unlike MPI, lender’s mortgage insurance (LMI) exists to protect the lender, not the borrower. LMI is generally required when a borrower has a deposit that is less than 20% of the value of the property. This insurance protects lenders in case you default on your home loan. LMI allows the lender to recover the funds.
Lender’s mortgage insurance can be useful for a borrower as it allows you to enter the property market even if you do not have the full 20% saved. But, it does not protect you in the case of defaulting and for this reason, so it is important you also consider MPI.
Choosing MPI
MPI can offer a safety net against unforeseen circumstances that may jeopardise your ability to make your monthly home loan repayments. It secures against involuntary unemployment, illness, injury or death, ensuring continuity in your payments.
While not compulsory, MPI provides you with reassurance and security. How much your MPI will cost will depend on various factors including your age, your home loan, your occupation and your loan terms. For this reason, it is recommended you speak to a finance broker in Sydney to try to get the insurance suited to your needs.
MPI is not to be confused with lender’s mortgage insurance which, unlike MPI, focuses on the lender and not the borrower. So, it is important you take care of yourself and your dependents.
Would you like to make sure you are covered in the event of loss of income? Speak to a finance broker about what options are available to you. Loan Station in Sydney is an experienced broker ready to assist. Contact us today.
