Mortgage Insurance

GUIDE TO MORTGAGE INSURANCE

It’s important for borrowers to be aware there are two types of mortgage insurance – the one you pay to protect your lender, the other you pay to protect yourself, your family and your home. Understanding the two types will ensure you’re not caught thinking you’re protected when you’re not.

LENDERS MORTGAGE INSURANCE (LMI)

Lenders usually require the borrower to take out this type of insurance if the borrower cannot provide normally around a 20% deposit on the property they seek to purchase or if they are applying for a nonconforming loan. It protects them if the borrower defaults on their loan.

The borrower has to purchase the insurance as a once off premium. The cost is dependent on the amount of the loan, value of the property, stamp duty, and the type of loan. The lender will normally pass this cost directly to the borrower.

If it comes to the point when the property has to be sold due to the borrower defaulting, and the proceeds from the sale don’t pay off the loan in full, LMI will cover the lender for the shortfall. However, the insurance company may seek to recover the shortfall from the borrower.

PERSONAL INSURANCE

Taking out a mortgage and buying a home is often the single biggest financial outlay of your life, therefore it is advisable to consider personal insurance to assist you in make your repayments in the event of illness, accident or injury.

There is no single insurance product to protect your home if you can’t make your mortgage repayments, however, there are a number of personal insurance products to consider i.e. Life Insurance, Income Protection Insurance, Trauma or Crisis Insurance and Total and Permanent Disability Insurance.

The choice is yours as to whether you take out this type of insurance, but it would be particularly wise especially if you are for example, single, a single income family or self employed.