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Two main types of mortgage insurance policies are offered in Australia: lenders’ mortgage insurance and mortgage protection insurance. Both types of insurance policies serve entirely different purposes and it is essential for a prospective homeowner to not only understand the differences between the two but the value of these policies too.
Lenders’ Mortgage Insurance
Lenders’ mortgage insurance safeguards a mortgage lender against loss in the event that a borrower defaults on their loan and their property is consequently repossessed and sold. The insurance covers a lender against the amount of money that is recouped from the sale of the property when insufficient money is obtained to pay off the loan in its entirety. The lender applies for mortgage insurance directly from their mortgage processing centre. The lender, not the borrower, is therefore covered by lenders’ mortgage insurance. However, the borrower is forced to meet the cost of the policy.
The majority of mortgage insurance companies offer mortgage insurance to lenders for owner occupied loans, construction loans, home improvement loans, home extension loans, property investment loans, principal and interest loans, and interest-only loans. For lenders, lenders’ mortgage insurance provides them with the confidence that they require to approve home loans. It enhances their ability to provide home loans to a wide variety of customers. For borrowers, lenders’ mortgage insurance enables them to buy their chosen residential home or investment property with greater speed, enabling borrowers with deposits of less than 20% to step onto the property market earlier than they would usually be able to.
Lenders’ mortgage insurance is associated with a one-time fee, paid at the time of loan settlement. The amount of money that an individual borrows and the size of the deposit that they place play a key part in determining the lenders’ mortgage insurance payment that an individual must pay out. Before an insurance company is able to provide insurance cover for a mortgage, the prospective property owner’s financial background is inspected to ensure they are sufficiently able to meet the cost of the mortgage repayments and that the risk of the property owner defaulting on their mortgage is relatively low.
Mortgage Protection Insurance
Mortgage protection insurance aids an individual in meeting the cost of their mortgage repayments and hence, retaining their home, in the event of injury, illness, unemployment, disability or death. Depending on their own personal circumstances and dependents, a mortgage policyholder can tailor their mortgage protection insurance to safeguard themselves against financial losses resulting from a range of eventualities.
Unlike lenders’ mortgage insurance, mortgage protection insurance protects the borrower, not the mortgage lender. The product is available for purchase for both residential and commercial properties that are used as primary homes or as investment properties. The benefit paid out as a result of a mortgage protection insurance claim is used exclusively to cover the cost of any outstanding mortgage debt. Mortgage protection insurance therefore prevents an individual from suffering from any financial strain associated with their illness or injury, enabling them to focus on making speedy recovery.