Two types of insurance policies on mortgages frequently confuse many borrowers, especially first home buyers: mortgage insurance and mortgage protection insurance.
You don’t need to pay for both policies, but you may be required to take out one of them if you lack the funds for your property purchase.
Here’s how the two differ.
Mortgage insurance
More commonly known as lender’s mortgage insurance (LMI), this type of policy is designed to protect the lender in the event that you default on your loan.
Lenders typically require borrowers to pay for LMI when their loan-to-value ratio is greater than 80 per cent.
LMI pays the lender the shortfall amount if you default on the loan and the selling price of your property isn’t enough to cover your loan amount.
Your lender will determine whether you will be required to pay for LMI, but the general rule is that you are required to pay for LMI if your deposit is less than 20 per cent of the loan amount.
Most LMI are supposed to get cancelled automatically once your LVR falls below 80 per cent – typically around 78 per cent – but make sure to remind your lender so you don’t pay extra.
Mortgage protection insurance
Mortgage protection insurance (MPI) is a type of insurance policy that is designed to protect you – the borrower – in the event that you are unable to make repayments.
Availing an MPI isn’t required by the lender and is purely voluntary on your part. However, it is still an important policy to consider especially if you may potentially lose your job or are unable to work due to incapacity.
If you make large mortgage repayments or have a long way to go before your home loan is fully paid, you may wish to consider taking out an MPI.
However, if you have a stable job and a low chance of being temporarily or permanently incapacitated, you may skip taking out an MPI.
Your home is likely one of the biggest expenses you will have, so it’s important to ensure that it is properly insured in case anything bad happens. However, it’s also important to understand what type of protection you really need so that you don’t pay extra for unnecessary policies.
