Lender's Mortgage Insurance and Mortgage Protection Insurance: What's the difference?

As a first homebuyer, there’s plenty of jargon you'll need to wrap your head around to have the best chance of finding your dream home. 

One of the most common sources of confusion is the difference between mortgage protection insurance and lenders mortgage insurance. Let’s unpack these definitions, and how these products could help you in your homebuying journey.

Mortgage Protection Insurance FAQs

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What is mortgage protection insurance? 

Mortgage protection insurance is a type of insurance a borrower can take out when they sign up for a home loan. The basic idea is that if anything unexpected happens and affects your ability to make repayments, the policy will cover your shortfall. 

What does mortgage protection insurance cover?

Mortgage protection insurance covers the cost of the monthly repayments if the borrower loses their job, suffers illness or injury, or passes away.

The amount of cover a borrower will receive will vary depending on the policy and the event. For example, a typical policy might provide:

  • Up to $1,000,000 to pay off the loan if the borrower passes away. Any money left over will go to the borrower’s estate to be used however they like.
  • Up to $7,500 a month to cover repayments if a borrower is unable to work due to illness or injury (this may only be up to 30 days).
  • Up to $7,500 a month to cover repayments if a borrower becomes unemployed (this may only be up to 90 days).

How does mortgage protection insurance work?

Mortgage protection insurance works like a life insurance or income protection policy, in that it could potentially cover home loan costs if the policyholder is unable to make repayments in certain circumstances. It is an optional form of insurance available to some home loan customers.

What are the benefits of having mortgage protection insurance?

Like any insurance policy, mortgage protection insurance helps to minimise the financial impact on your family if something happens to you. Knowing you won't fall too far behind with your repayments if your finances take a hit can offer significant peace of mind and safeguard your family’s finances.

Who needs mortgage protection insurance?

There are a few kinds of homebuyers who could enormously benefit from mortgage protection insurance. These include borrowers with a small deposit (LVR < 80%) or who would like to mitigate the financial risk to their family should something unexpected happen to them (like illness or death).

Are there any drawbacks of having mortgage protection insurance?

Mortgage protection insurance comes with a limit on the length of time you’ll receive cover. For instance, a borrower looking to claim on their mortgage protection insurance due to an unexpected illness may only have cover for up to 30 days.

Something else to consider before taking out mortgage protection insurance is whether you may already have cover for your mortgage repayments in another policy. This could be found in life insurance or income protection insurance as part of your superannuation fund, so it might be a good idea to review these policies before signing up.

How much does mortgage protection insurance cost?

The cost of mortgage protection insurance will vary for different borrowers. Generally, an insurance provider will look at the following when determining how much you'll pay:

  • The number of names on the policy
  • The loan amount
  • Your age
  • The repayment amount

But when it comes to weighing up the cost, it’s up to you to determine whether the price is something you think is worth it. Say for instance your policy costs $3.50 a day, while this may seem like a minor amount, this totals to $1,277.50 each year.

Will I need to pay any excess on my mortgage protection insurance?

While you won’t have to pay excess, there is something called an excess period - this is the amount of time you’ll wait until your mortgage protection insurance kicks in. While you can choose the period of time, keep in mind that the shorter it is, the higher your premium could be.

Are there any exclusions with mortgage protection insurance?

The type of exclusions in your policy will depend on the insurance provider. Be sure to read the Product Disclosure Statement (PDS) for any conditions that might deny you cover, such as pre-existing medical conditions.

Can I take out mortgage protection insurance with another lender?

This will depend on your home loan lender. Many lenders offer policies exclusively to their customers, like ANZ, while other lenders such as Westpac offer them to all mortgage holders. You might also get mortgage protection as part of your existing life insurance or income protection policy, such as through your super fund.

Lenders Mortgage Insurance (LMI) FAQs

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What is lender's mortgage insurance?

Lenders Mortgage Insurance (LMI) is a one-off payment that borrowers who don’t have a deposit of 20% or more pay (LVR < 80%) to protect the lender if they were to default on their loan.

How much does LMI cost?

Similar to Mortgage Protection Insurance, the cost of Lenders Mortgage Insurance is determined by a number of factors. These include:

  • The size of your home loan.
  • The loan type (owner occupier or investor).
  • Your deposit amount.
  • Your employment status.

How do I pay for Lenders Mortgage Insurance?

LMI is typically paid at the loan settlement and is usually added onto the loan amount.

Is mortgage insurance transferable?

Unfortunately, no. If you decide to refinance your home loan in the future by moving to a better deal and the loan to value ratio (LVR) is still higher than 80%, you will have to pay the premium again.

Are there any benefits in paying mortgage insurance?

While Mortgage Insurance covers the lender, not you, it can be a way for first homebuyers to break into the property market without having the requisite 20% deposit.

What type of insurance is best for mortgage protection?

Property buying can feel like a high-stakes game, but mortgage protection insurance policies can help reduce financial risk for both the borrower and lender. While it’s impossible to call one policy the ‘best’, if you’re a borrower, the best mortgage protection insurance will fit comfortably into your budget and other needs.

For most healthy people, especially young first homebuyers, the best mortgage protection insurance policy will usually come as an extra on your life insurance policy. That way, you get the biggest bang for your buck and can enjoy more comprehensive protection against other unexpected life events.

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