There are a number of insurance options that will help protect the mortgage, reports Peter Weekes.
Talk of rising house prices has been the mainstay of dinner party conversations around Australia since 2000. Coupled with falling interest rates, the property boom filled the large gap left in our hearts and wallets by the collapse of the tech boom.
However, with the ever present threat of redundancy and some economists predicting the next move in interest rates will be up rather than down it may be time to take stock of the financial security of your biggest asset.
To be sure, for all the talk of an imminent property bust, banks and mortgage brokers continue to fall over themselves to pour money into customers' pockets - in June, mortgages reached a record $10.2 billion, a 23.1 per cent jump in just 12 months. And, come what may, the banks know they will get most of this money back. The only losers in a market shakeout will be you and your family.
For years now, banks and brokers have insisted that people who borrow more than 80 per cent of the value of their property take out mortgage insurance - but this does not cover the borrower, only the lender. If the borrower defaults for any reason, the insurer will cover any shortfall on the forced sale of your home - and then come after you for the difference.
Phil Naylor, the chief executive of the Mortgage Industry Association of Australasia, says many people are unaware that they could be required to take out Lenders Mortgage Insurance (LMI) when borrowing for a home loan - or are under the false impression that it protects borrowers should they be unable to meet their repayments.
Denis Orrock of InfoChoice, which monitors bank products, agrees there is a high degree of confusion about mortgage insurance and who it covers.
"I think a lot of people think 'I pay mortgage insurance, therefore I'm covered'. They don't realise that they are paying the premium to insure the mortgage for the vendor," he says.
Swann Insurance, owned by IAG, offers one of the few products to protect home borrowers. Its consumer credit insurance is designed to meet customers' loan repayment obligations in the event of death, illness, injury or trauma.
Swann's sales and distribution manager, Andrew Simpson, says its product is offered through most financial institutions so borrowers can purchase the protection when organising home loans.
Swann offers a loan repayment insurance product for personal loans and a mortgage repayment insurance product for mortgages and mortgage-secured lines of credit.
"In the event a customer experiences a defined loss that falls within the scope of policy cover, Swann Insurance will meet the loan repayments on behalf of the customer for up to five years for personal loans and 30 months for mortgages and mortgage-secured lines of credit. In the event of death, Swann pays the outstanding balance of the loan or mortgage," Simpson says.
"Mortgage repayment insurance for a $200,000 mortgage, including death, disability, unemployment and trauma cover, can cost as little as $60 a month, when included as part of a total loan package. Some of our business partners also allow their customers to pay for mortgage repayment insurance independently of their loan package."
Orrock says borrowers can also use "stopgap" measures like income protection insurance to protect themselves against job loss or illness.
Naylor says life insurance, trauma
or crisis insurance and total and permanent disability insurance can also offer borrowers financial relief if they become injured or permanently incapacitated.
He says these insurance options should be considered by one-income families, singles, self-employed and casual or contract workers.
As with most insurance, costs vary depending on age, occupation, sex and the waiting period for a payment.
