In this article, we cover:
What is mortgage protection insurance?
Mortgage protection insurance is an optional form of insurance available to some home loan customers. A form of consumer credit insurance (CCI) like personal loan protection insurance, mortgage protection insurance is designed to provide a payout should you become unable to meet your home loan repayments in certain circumstances, but it has a number of risks and potential drawbacks that you should be aware of before applying for a policy.
Mortgage protection insurance in Australia generally works like an income protection or life insurance policy that only covers home loan costs. It can potentially pay a benefit if a policyholder can no longer meet their home loan repayments. It should not be confused with lenders mortgage insurance, a separate type of cover which protects lenders should a borrower default on their repayments, but which some borrowers with low deposits have to pay for.
Mortgage protection insurance has become less common in recent years than it used to be, and major lenders such as Commonwealth Bank and NAB have stopped selling it to new customers. However, it is possible your lender or mortgage broker may offer it to you as part of the home loan application process.
What does mortgage protection insurance cover?
Depending on the insurer and policy, mortgage protection insurance may be able to provide a monetary benefit to a policyholder or their loved ones if the policyholder:
- loses their job involuntarily
- becomes unable to work due to illness or injury, or
- passes away.
For example, if a policyholder dies and their loved ones successfully lodge a claim under a mortgage protection policy, the insurer may pay a one-off lump sum towards the outstanding balance on their home loan. Alternatively, if a policyholder who normally works full-time loses their job and their insurer approves their claim, they may be able to receive regular insurance payments to cover their home loan repayments for a limited period of time.
Bear in mind that mortgage protection insurance is usually linked specifically to home loan costs. It will generally not cover any of the policyholder’s other expenses like a life insurance or income protection policy might.
How much does mortgage protection insurance cost?
The cost of mortgage protection insurance can vary depending on a policyholder’s personal circumstances, including:
- the size of their home loan
- the size of their regular repayments
- whether the policy is just in their name or held jointly with another person
- their age
- the specific insurer they choose
- the details of the policy, including specific inclusions or exclusions
Mortgage protection insurance may sometimes be cheaper than life insurance due to offering less extensive cover, but this is often not the case. CCI, including mortgage protection insurance, has also attracted heavy criticism in recent years for offering poor value to consumers.
The Consumer Action Law Centre warned in 2015 that consumers could “expect to pay over $2,000 for CCI”, and a more recent ASIC review in 2019 found that policyholders only received about 19c back for every $1 paid in premiums.
ASIC’s Moneysmart website warns that in some cases, mortgage protection insurance premiums are added onto the balance of a customer’s home loan, which can cause the cost of the product to increase “significantly” due to the extra interest being charged on the loan.
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Is mortgage protection insurance worth it?
Whether mortgage protection insurance is worth its cost for you will depend on your personal circumstances, but if you’re considering taking out a policy it is worth bearing in mind the following points, which were among the findings from ASIC’s recent review of the CCI industry.
- The regulator described CCI as “extremely poor value for money”, noting that customers received back only 19% of the premiums they paid lenders for the cover.
- CCI sales tactics and practices often caused harm to consumers, according to ASIC. For example:
- some consumers were sold CCI despite being ineligible to claim under the policy they were sold
- lenders often used telemarketers to sell CCI, and these staff used “unfair sales tactics” such as failing to inform consumers of exclusions under the policy.
- Some consumers were incorrectly charged for CCI, including some who were charged premiums despite having already paid off their loan.
- Many lenders lacked processes to help customers experiencing financial hardship make a CCI claim.
Additionally, bear in mind that mortgage protection insurance policies often place limits or restrictions on when and how much a customer can claim. For instance:
- The benefits a policyholder or their family can receive may be capped. This means the money they get may not cover the entire home loan amount, or the payments may stop after a set number of days or months.
- It is common for certain claims or policyholders to be excluded. For example, a policyholder may find themselves ineligible to make a claim if they were self-employed or working part-time before losing their job, or if they had a pre-existing medical condition.
- There may be waiting periods on some policies, meaning a policyholder may be unable to make a claim or receive benefits for a certain amount of time.
- Mortgage protection insurance payouts can generally only be used to help cover home loan expenses, not spent on other living costs.
You may also want to think carefully about how mortgage protection insurance stacks up against life insurance and income protection insurance, since even though they tend to cover similar events, life and income protection insurance payments tend to be more flexible about how the benefits can be used. It is possible you may not need mortgage protection insurance, particularly if you already have life and income protection cover, such as through your super fund.
If you’re weighing up whether mortgage protection insurance is right for you, Moneysmart advises taking as much time as you need to make sure you need it before committing to a policy. If you’re experiencing financial hardship, it could be worth contacting your lender about its financial hardship policy, or speaking to a financial counsellor. You can contact the National Debt Helpline on 1800 007 007 and ask to speak to a counsellor in your area confidentially and for free.
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