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What is Mortgage Protection Insurance?

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Your home loan will typically be your largest debt, while your home is your largest asset. One way to ensure that you can keep paying your loan off and retain ownership of your home is through Mortgage Protection Insurance (MPI).

But is mortgage protection insurance really worth it, or is it an irrelevant insurance add-on? Find out here, as well as how much it costs and what it covers.

What is mortgage protection insurance?

Mortgage protection insurance is a type of life insurance where the borrower is protected in the case they can no longer repay the home loan because of certain events such as:

  • Unemployment
  • Critical illness
  • Injury making you unable to work
  • Death

Mortgage protection insurance will help you cover your home loan repayments if these unplanned circumstances arise. By covering the mortgage if you die, it ensures your beneficiaries will be able to retain the home.

Part-time or casual employees and the self-employed, all working less than 20 hours a week, will typically not be able to get cover.

What’s the difference between mortgage protection insurance and lender’s mortgage insurance?

Some people may confuse mortgage protection insurance and Lender’s Mortgage Insurance (LMI). The difference between the two is that mortgage protection insurance protects you in the event you default on the loan.  

On the other hand, your lender is protected by lender’s mortgage insurance in case you default on the loan. Unlike insurance policies which are usually optional, LMI is often mandatory and applies when a borrower can’t pay a deposit of at least 20% of the property’s price.

What does mortgage protection insurance cover?

With mortgage protection insurance, you will typically receive one of three payouts (depending on the reason):

  • A one-off lump-sum payment towards the outstanding balance of the home loan. Any remaining funds can be used by your family for whatever purpose.
  • A monthly payment to cover your repayments due to you suffering serious illness or injury. These payments can range anywhere from 30 days to three years.
  • A monthly payment to cover your repayments due to losing employment - often no longer than three months. Mortgage protection insurance only covers unemployment if you have been fired or made redundant - not if you have quit your job.

One important point to note is most policies exclude any pre-existing medical conditions. For example, if a medical professional has cited you as having an illness or injury in the 12 months prior to buying the insurance, it’s unlikely you will be covered.

How much does mortgage protection insurance cost?

The cost of mortgage protection insurance will depend on a number of different factors including:

  • The size of your loan
  • The repayment amount
  • The age of the policy holder
  • If you hold a single or joint policy with your partner
  • The level of cover
  • The insurer

You can pay for mortgage protection insurance either as a lump sum payment or you may be able to make your payment monthly, depending on your insurer.

As a general rule of thumb, mortgage protection insurance policies cost around 0.5% to 1% of the loan amount on an annual basis. When shopping around for an insurer, make sure to get a range of quotes to ensure you’re getting the best deal.

Do you need mortgage protection insurance?

Mortgage protection insurance only covers you for your mortgage repayments should you suffer an event that affects your income. This means, you will still have other bills to pay such as: living expenses (energy bills, phone bills), car registration, school tuition fees, and food expenses.

Here are the advantages and disadvantages to see if you need mortgage protection insurance.

  • Gives you peace of mind about your mortgage repayments in case of an unexpected circumstance
  • It will help you keep your home - one of your biggest assets
  • Most MPI providers offer premium discounts for joint policies
  • Flexible options available for features and type of payout
  • There are limitations on the events it covers
  • Only covers home loan repayments
  • Other options may be better value for money
  • You might end up with an overpriced policy if your property decreases in value
  • Only one payout if all parties on the policy die
  • Poor consumer outcomes - has fallen out of favour in recent years with the Australian Securities and Investments Commission (ASIC)

Are there alternatives to mortgage protection insurance?

If you feel mortgage protection insurance may not be right for you, here are some other options to consider, all of which can help with mortgage repayments.

Life insurance

Otherwise known as death cover, life insurance pays out a lump sum to whoever is nominated in your policy when you die. While the party can use the money for whatever they wish, it could go towards mortgage repayments and any other debts.

Income protection

Income protection covers you in the event you lose your income to sickness or injury. It is designed to cover your income by up to 85%, which you can use as you wish (for all your expenses, not just the mortgage). To get covered, you must pay a monthly fee.

Total and permanent disability (TPD) cover

TPD provides you with a lump sum for permanent loss of work due to serious illness or injury. Often included with life insurance, you can use the payout to cover your mortgage repayments and other necessary bills.

Whether you’re buying your first, next, or investment property, loans.com.au is here to help.

Contact one of our friendly lending specialists to get the keys to your dream home for less or save thousands on your existing loan.

About the article

As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.

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