Do You Need Mortgage Insurance?
For many Kiwis, owning a home is a significant milestone and often the largest financial commitment they’ll make in their lifetime. However, with this commitment comes the responsibility of ensuring mortgage payments are met, even in the face of unexpected life events. This is where mortgage insurance comes into play, offering a safety net for homeowners. But do you really need it? Let’s delve into the world of mortgage insurance in New Zealand and help you make an informed decision.
What is Mortgage Insurance?
Mortgage insurance, often referred to as mortgage protection insurance in New Zealand, is designed to cover your mortgage repayments if you’re unable to do so due to certain circumstances. It’s important to note that this is different from lenders’ mortgage insurance (LMI), which protects the lender, not the borrower.
Typically, a mortgage insurance package in New Zealand comprises two main components:
- Life Insurance: This pays out a lump sum if you pass away or are diagnosed with a terminal illness, potentially clearing your mortgage debt.
- Mortgage Protection Insurance: This covers your regular mortgage repayments if you’re unable to work due to illness or injury.
How Does Mortgage Protection Insurance Work?
When you take out a mortgage protection policy, you choose:
- The amount of cover (usually up to 110% of your mortgage payments)
- The wait period before payments begin
- The payment period (how long the insurer will continue making payments)
If you become ill or injured and can’t work, the insurer will make monthly payments to cover your mortgage after your chosen wait period ends. These payments continue until you can return to work or until the end of your payment period, whichever comes first.
When Might You Need Mortgage Insurance?
Several scenarios make mortgage insurance worth considering:
- First-home buyers: If you’ve just stepped onto the property ladder, mortgage insurance can provide peace of mind as you navigate this new financial responsibility.
- Families reliant on a single income: If your household depends primarily on one income, the loss of that income could be financially devastating.
- Limited savings: If you don’t have a substantial emergency fund, mortgage insurance can serve as a financial buffer.
- High loan-to-value ratio: If you’ve borrowed more than 80% of your home’s value, you might be required to have some form of mortgage insurance.
Mortgage Protection vs Income Protection
While both offer financial security, they operate differently:
- Mortgage protection is specifically designed to cover your mortgage repayments.
- Income protection is broader, replacing up to 75% of your pre-disability income, potentially covering not just your mortgage but other living expenses too.
Costs and Considerations
The cost of mortgage insurance varies based on factors such as your age, health, occupation, and the amount of cover you need. According to MoneyHub’s research, annual premiums for a $500,000 mortgage can range from about $2,800 to $3,000 for a 35-year-old non-smoking male.
It’s crucial to weigh these costs against the potential benefits and consider your overall financial situation. Some key points to ponder:
- Do you have sufficient savings to cover your mortgage for several months if needed?
- Does your employer offer any income protection or sick leave that could cover you?
- Could you rely on family support if you were unable to work?
Alternatives to Consider
- Building an emergency fund: Setting aside 3-6 months of living expenses can provide a financial cushion.
- Income protection insurance: This might offer more comprehensive coverage if you can afford it.
- Critical illness cover: This pays out a lump sum if you’re diagnosed with specific serious illnesses.
- Trauma insurance: Similar to critical illness cover, this provides a lump sum payment for certain medical conditions.
Making Your Decision
Deciding whether you need mortgage insurance ultimately depends on your individual circumstances. Consider your financial obligations, savings, other insurance policies, and risk tolerance. It’s also worth noting that mortgage insurance policies can vary significantly between providers, so it’s essential to compare options carefully.
Christopher Walsh, founder of MoneyHub, advises, “If your biggest asset is your health, having even a short-term illness which causes you to miss work can have significant financial consequences. While ACC will cover you for an injury, illnesses won’t be covered, so you will need to find the money to keep up with mortgage repayments.”
Mortgage insurance can provide valuable peace of mind for many New Zealand homeowners, offering protection against unforeseen circumstances that could jeopardise their ability to meet mortgage repayments. However, it’s not a one-size-fits-all solution.
Before making a decision, carefully assess your financial situation, consider alternatives, and if possible, seek advice from a financial advisor. Remember, the goal is to protect your home and financial wellbeing in a way that best suits your individual needs and circumstances.
Ultimately, whether you need mortgage insurance depends on your comfort with risk, your financial buffer, and the value you place on the peace of mind it can provide. By understanding the options available and how they align with your situation, you can make an informed decision that helps secure your financial future and your home.