Know the difference between lenders’ mortgage insurance and mortgage protection insurance
If you’re a first home buyer and new to the property market, it’s easy to confuse mortgage insurance and mortgage protection insurance. But there’s a big difference between them – one protects your lender and one protects you.
Lenders’ mortgage insurance
Mortgage insurance, commonly referred to as lenders’ mortgage insurance (LMI), is taken out by your lender to protect them if you default on your mortgage and your home is repossessed. After assessing a successful claim, the insurer will pay the lender the difference between the sale price and the outstanding amount on the loan.
Lenders are legally required to take out LMI. Generally, where lenders are lending to someone who has a deposit of 20% or less of the property value, they will pass on the LMI premium to the borrower.
Lenders’ mortgage insurance can be expensive, but if your deposit is lower than 20% you will likely be required to pay it. The advantage is that it allows borrowers with smaller deposits to get into the property market sooner without having to wait to save a 20% deposit.
Mortgage protection insurance
Although you might be asked to pay a LMI premium on top of your home loan, the LMI doesn’t protect you. You will need to take out separate mortgage protection insurance in order to protect you in the event that you are unable to make your home loan repayments. Mortgage protection insurance is usually sold as an add-on to life or income insurance.
Mortgage protection insurance is not sold as part of your home loan package. You should seek independent advice from a financial advisor who is experienced in insurance products and can talk to you about your coverage needs.
Get the right advice
A MoneyQuest mortgage broker can help you factor the price of your LMI premium into your home loan and we can also talk to you about mortgage protection insurance.
Disclaimer:
This article is written to provide a summary and general overview of the subject matter covered for your information only. Every effort has been made to ensure the information in the article is current, accurate and reliable. This article has been prepared without taking into account your objectives, personal circumstances, financial situation or needs. You should consider whether it is appropriate for your circumstances. You should seek your own independent legal, financial and taxation advice before acting or relying on any of the content contained in the articles and review any relevant Product Disclosure Statement (PDS), Terms and Conditions (T&C) or Financial Services Guide (FSG).
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