Do I Need Mortgage Protection Insurance as an Expat?
6-MINUTE READ
Properties are some of the most significant financial assets most of us own throughout our lives. It’s also the source of one of the most critical debts most of us will have to pay. Whether it’s your first home or an investment property in Australia while you live abroad, you might have heard the term’ mortgage protection insurance.
If you’re unable to make your home loan payments for any reason – such as involuntary unemployment or severe illness – mortgage protection insurance will help you sleep better at night. Read on to learn more about mortgage protection insurance and whether you need it.
What Is Mortgage Protection Insurance and How Does It Work?
Mortgage protection insurance is a product that protects homeowners and borrowers from falling behind on their mortgage repayments or defaulting. It is also known as home loan insurance and consumer credit insurance. Borrowers may take mortgage protection insurance out on residential and commercial properties and investment loans or owner-occupier home loans.
It’s not mandatory to take out mortgage protection insurance. However, it might be a good idea to protect yourself and your family if you suddenly find yourself in a financially difficult situation. Insurance providers might provide payments as lump sum payments or ongoing payments to help you keep up with your home loan repayments.
For whatever reason you’re in a difficult financial situation, mortgage protection insurance might be a lifeline for you and your loved ones.
If you find you cannot make your home loan repayments because of an illness, death, or any other event covered by the policy, you can make a claim and receive a payout to help repay the loan amount. In the event of death, your listed beneficiary will receive the lump sum or ongoing payout.
Generally speaking, in the event of death or terminal illness, you will receive a lump sum. If you claim for involuntary unemployment or are unable to work because of illness or injury, you will get regular ongoing payments.
Get a free Australian mortgage assessment today.
What Does Mortgage Protection Insurance Cover?
Like all insurance policies, each mortgage protection insurance policy covers slightly different terms. If you already have mortgage protection insurance, double-check the agreed conditions. If you’re looking to take out a policy, consider what you need it to cover.
Each lender might provide slight differences. However, these are the general circumstances that mortgage protection insurance covers:
- Death or after a terminal illness diagnosis
- Involuntary unemployment
- Serious illness or injury that prevents you from working
You can read the details of what your policy covers in the Product Disclosure Statement (PDS) you receive when taking out the policy. To ensure you’re getting the right product for your personal objectives, compare income protection policies and ask your mortgage broker for advice.
What's Not Covered?
There are certain circumstances that many policies do not cover. These include:
- Any illness, injury, or condition subject to medical consultation in the year before your policy starts and leads directly or indirectly to your inability to work.
- Death by suicide within the first year of your cover
- Involuntary unemployment within the first few months of your policy start date
Timings and conditions differ from lender to lender, but it’s worth checking what you’re not covered for before taking out a policy.
Similarly, many lenders won’t cover you if:
- You do not work a certain number of hours a week (about 20 hours of paid employment).
- You voluntarily leave your job.
- Your employment is terminated through willful misconduct.
- You have any illnesses or injuries through the use of alcohol or drugs.
What Types of Property Does Mortgage Protection Insurance Cover?
Your mortgage protection insurance policy depends on the size of your home loan and the outstanding balance and loan term rather than property type. For the most part, policies cover all properties (including residential, commercial, and investment properties).
Speak to your insurance provider if you’re unsure about whether your home loan and property meet the criteria.
The Pros and Cons of Mortgage Protection Insurance
Of course, taking out mortgage insurance is another expense in an already costly process. How can you ensure that your mortgage insurance is worth the cost? Here are the pros and cons.
Pros of a Mortgage Insurance Policy
- Peace of mind – if you cannot work, your mortgage insurance should offer peace of mind that you won’t fall behind on your outstanding loan repayments.
- Buying a house is one of the most significant investments you will ever make. Mortgage insurance protects your investment and your home.
- Discounts – some insurance providers offer discounts if you also have other policies (e.g. pet insurance) with them.
- Flexibility – you can choose how much or little your policy covers. For instance, you could choose a policy that protects you and your family in case of death or one that covers all potential circumstances.
- You can budget for your mortgage protection insurance alongside the home loan itself. Consider how the home loan premiums will extend your mortgage repayments and factor them in with your other living costs.
Cons of a Mortgage Insurance Policy
- A mortgage protection insurance policy doesn’t cover the property, only the home loan. You will need to take out another policy to protect the property itself. You also might want to take out an additional income protection insurance policy to protect your other investments.
- There is only one payout – if a joint borrower is also unable to work, the policy will only pay out once.
- If the housing market suffers or your property loses value, you might end up with an overpriced mortgage and costly premiums.
Get a free Australian mortgage assessment today.
How Much Does Mortgage Protection Insurance Cost?
Your mortgage protection insurance cost depends mainly on what your policy covers. A comprehensive policy might cost a lot more than a basic one. Personal circumstances that may affect the cost of your income protection insurance include:
- The size of the home loan
- The size of your monthly mortgage repayments
- Whether the policy is a single or joint one
- Your age
- The specific lender and insurer
- How much the insurance policy covers
Generally speaking, it costs between 0.5% to 1% of the annual loan amount. Talk to your lender or mortgage broker about mortgage protection insurance policies and available features.
What to Look for When Comparing Mortgage Protection Insurance
Mortgage protection is almost as important as choosing the home loan itself. You need an inclusive policy that benefits your needs. Here is what you should consider when comparing income protection insurance.
- Coverage: Look at the payout amount, how much it covers, and the circumstances of a payout. If you cannot repay the mortgage yourself, you need to make sure that your policy will cover all your mortgage expenses (including interest payments and principal).
- Waiting period: How long will your insurer take to payout? If something happens, you need your insurance policy to cover your repayments as soon as possible.
- Dependents: If you have any dependents (children or ageing parents), how long will they remain dependent on you? This might help you determine the level and term of cover.
- Other income: If you have other sources of income (such as rental payments from your investment property), or assets you can sell, you might not need a fully comprehensive insurance policy. However, if you only have one income stream, you may want complete coverage.
- Risk factors: The extent of your mortgage protection coverage depends on your health and lifestyle. If you have any particular risk factors that mean you might lose your job, fall ill, or die, you need a specialised insurer who will cover your needs.
- The provider: Make sure you choose a respected and established insurer. Check out previous testimonials and ask your mortgage broker for recommendations.
How Do I Know If I Need Mortgage Protection Insurance?
Many Aussie homeowners don’t have a mortgage insurance policy. While it’s not a requirement, it might be a good idea if you want financial security. It’s a personal choice; weigh up the pros and cons and whether it’s worth the financial cost. If your employment is unstable or you’re self-employed, you might consider it worthwhile.
Other Insurance Types
Many people confuse mortgage protection insurance with Lenders Mortgage Insurance (LMI), income protection, and life insurance. While all these products help you (or the lender) in times of financial difficulty, they are different.
Lenders Mortgage Insurance
Lender’s Mortgage Insurance (LMI) is a premium you pay the lender if you cannot supply a deposit of 20%. Most lenders will allow you to borrow up to 95% of the property purchase price. However, if the loan to value ratio is above 80%, the lender will require you to take out LMI.
This is a hefty premium alongside the loan amount protecting the lender should you default on your payment.
Get a free Australian mortgage assessment today.
Income Protection Insurance
Income protection insurance insures your salary or wage, not the home loan. In the case of unexpected events, the insurer will pay you a sum to cover your missing wages. Insurers usually pay up to 85% of your salary. If you pass away, they might pay a lump sum to your family.
You can use your income protection insurance to repay your mortgage and for other living costs.
Life Insurance
Mortgage protection insurance and income protection are both types of life insurance. If you were to die or are diagnosed with a terminal illness, the insurer pays a lump sum to your family. They might use this to repay your mortgage or for other costs.
Total and Permanent Disability (TPD)
Like life insurance, total and permanent disability cover provide you or your family with a sum if you are permanently unable to work due to illness or injury. You can use the lump sum payment for your mortgage repayments or other expenses.
Can I Get Mortgage Protection Insurance if I'm an Expat?
As an expat, it’s a good idea to insure yourself against a potential loss of employment or other income losses. While living abroad is an exciting adventure, you’re at higher risk. Fluctuating exchange rates, changing job markets, and other unexpected events might mean you lose your primary source of income.
As lenders are more suspicious of foreign currencies, you might find it hard to repay your mortgage. Therefore, a mortgage protection policy is a good safety net for your Australian property.
Is Mortgage Protection Insurance Worth It?
Whether mortgage protection insurance is worth the cost depends on your personal situation. If you’re considering taking out a policy for your home loan, consider the following points and seek personal advice.
- Is the additional monthly cost of insurance worth the protection?
- Are there any capped benefits? Ensure the insurance covers the entire home loan amount.
- Are you included in the insurance criteria? Some policyholders find that they cannot make a claim if they’re self-employed, working part-time or have a pre-existing medical condition. Ensure your insurance provider knows the details of your circumstances and covers expats.
- If you have any other income protection insurance, do you need mortgage protection too? Mortgage protection insurance only covers the home loan expenses, not any additional costs or other loans.
Mortgage Protection Insurance for Expats
Protecting your home loan is essential but an additional expense. Before taking out a policy, carefully consider whether it is the right choice for your circumstances. Are you at risk of losing your primary source of income? If so, you might consider mortgage protection insurance a good idea. However, you should speak to your mortgage broker first for personal advice.
Get a free Australian mortgage assessment today.
Frequently Asked Questions
What Is Mortgage Protection Insurance?
Mortgage protection insurance covers your home loan repayments if you cannot make them due to loss of income, illness, injury, or death. While each policy is different, it usually won’t cover the property or other expenses.
What Type of Insurance Is Most Suitable for Mortgage Protection?
Mortgage insurance protection is the best policy to cover your home loan repayments if you lose your source of income. Other income protection insurance policies and life insurance will also help you repay your home loan and cover other expenses.
Is Life Insurance the Same as Mortgage Protection Insurance?
Mortgage life insurance pays out if the policyholder dies, whereas mortgage protection insurance will cover you for a number of other reasons. Check your policy details to determine what your insurance covers.
Who Is Eligible for Mortgage Protection Insurance?
Anyone with a home loan can take out a mortgage protection insurance policy. If you’re self-employed or living abroad, check with your insurer that they cover you.
Is Mortgage Protection Insurance Tax Deductible?
No, generally speaking, mortgage protection insurance is not tax-deductible. If you have an investment property, you can deduct your home loan payments from your income tax. However, you cannot deduct your insurance premiums.
How Do I Make a Mortgage Protection Insurance Claim?
Contact your insurer and supply your policy number, the details of why you stopped working, and when you stopped working. The insurance policy shouldn’t take more than a few months to approve or reject your claim. If they approve your claim, it might take a few days (up to a month) to pay you a lump sum or begin monthly payments.
See What You Qualify For
