Preparing for the worst is the best policy

Lenders’ mortgage insurance

Required by lending institutions for people with low deposits, this insurance protects the lender against the risk of borrowers defaulting on their mortgage repayments.

Bridget Sakr, chief commercial officer at Genworth, which is one of the main suppliers of lenders’ mortgage insurance in Australia and helped about 38,000 people into homes in 2012, says lenders’ mortgage insurance was introduced in 1965 to help people with less than a 20 per cent deposit into homes.

These days it is paid by a range of borrowers – everyone from first-home buyers who don’t have a large deposit, to investors who have their equity tied up, and self-employed people – who may otherwise not be able to get a loan, or have to pay higher interest rates.

”It gives them an even playing field,” says Ms Sakr, noting that Genworth’s products, for example, allow for people to borrow up to 95 per cent of the value of a property.

The Insurance Council of Australia estimates that about 20 per cent of all mortgages in Australia are insured with lenders’ mortgage insurance.

Ms Sakr says lenders require people to take out mortgage insurance to ensure that should they default on repayments for any reason – whether it be for a marriage breakdown, unemployment or credit issues – any shortfall in the loan amount is covered.

”Where the borrower goes into default, the property is sold and there’s a shortfall between the sale price and what’s owed to the bank, our product covers 100 per cent of that loan amount.”

It’s usually charged as a one-off fee, which can be paid at settlement by the person buying a property, or capitalised on to the loan so payment simply becomes part of the monthly or fortnightly loan repayment.

While the fee amount depends on how much is being borrowed, Genworth says for someone borrowing $350,000 to buy a $400,000 home (an 88 per cent loan-to-value ratio) the fee comes in at $4620 (less for first-home buyers, who qualify for discounts of about 10 per cent).

If capitalised on the loan, this means about $8 a week on top of mortgage repayments.

The Insurance Council of Australia says the average lenders’ mortgage insurance premium is about $3000.

Mortgage protection insurance

Aimed at protecting a borrower’s ability to pay out a loan or to meet repayments, mortgage protection insurance needs to be taken out by the borrower, and is independent of lenders’ mortgage insurance.

Jo Attard, of Moonee Ponds-based finance adviser Jo Attard & Co, says that while lenders’ mortgage insurance is aimed at protecting the lender, mortgage protection insurance offers protection for people working towards paying off a home loan. As well as covering a mortgage in the case of a person’s death, such products also offer ”living benefits” that cover the mortgage while a policyholder deals with a serious illness.

Ray Hair, chief executive of the ALI Group, whose products are available only through mortgage brokers, says his company’s offerings include loan protection insurance and loan repayment protection insurance.

The former product covers everything from the death of the policyholder to major traumas and the loss of jobs (this is for the first 12 months of the policy only), with benefits ranging from complete payouts of the policy in the case of the death of the policyholder to part-payment of benefits for specified events such as illness.

Loan repayment protection insurance, on the other hand, is aimed at protecting the borrower’s ability to make repayments if the borrower is unable to meet them for a specified period as a result of an accident or illness.

Mr Hair explains that ALI’s product will pay benefits for 52 specific events. ”We’ll be paying varying amounts from six months to 36 months of repayments, depending on what’s occurred.”

The premiums vary depending on circumstances such as age and smoking status of the policyholder (payments will generally not be made on pre-existing conditions), but Mr Hair says ALI’s average premiums are about $600 a year or $50 a month. Premiums are paid directly to the insurer.

Ms Attard says taking out mortgage protection insurance should be part of an overall repayment strategy.

”Because it’s no good having a house and then tragedy strikes and you can’t afford it,” she says.

Insurance Council of Australia’s Find an Insurer – findaninsurer.com.au

Mortgage & Finance Association of Australia – mfaa.com.au