Playing it safe: the advantages of mortgage insurance
Buying a home for the first time can be an expensive business, especially once the extras of stamp duty, conveyancing, moving costs and inspection reports have been factored into the equation.
In fact, the financial drain can feel as if your hard-earned savings are going anywhere but into your newfound home.
Worse still is if your savings plan wasn’t going according to plan when you discovered your dream home, and you may have to resort to taking out mortgage insurance.
Simply expressed, if you have less than a 20 per cent deposit (for example, $60,000 on a $300,000 loan), once all the other costs are paid, most lenders will insist upon borrowers paying this one-off fee.
According to the ANZ website (anz.com.au), studies show that homeowners with less than a 20 per cent deposit are more likely to default on their loans — with the consequence that they are viewed as being a greater risk.
Hence the need for lenders to have peace of mind.
Protecting the lender
As its name suggests, lenders’ mortgage insurance protects the lender — the bank or credit union — against non-payment or default (usually when three consecutive payments are missed) on your residential property loan. This means the lender is protected should they need to sell the security property and the proceeds do not fully repay the loan.
The amount paid varies according to the loan size and the loan-to-valuation ratio (for example: if you are borrowing 80 per cent or 95 per cent). And depending on your circumstances and lender, it may be incorporated into your loan or paid upfront.
The advantage of taking mortgage insurance is the flexibility it can give you, whether you are a first-home buyer, investor or simply want to upgrade to a bigger and better home.
If things are tight, it allows prospective first-time buyers some breathing space and the ability to escape the rental cycle sooner — especially when the market is rising quicker than you can save.
Open to all options
The same applies to investors and second or third-home buyers as, together with the equity in your home — it provides greater access to properties in a wider price range.
Alternatively, it can free up your funds for other investment purposes, such as shares or treating yourself to a holiday or new car.
If you want an extra safeguard that protects you should the worst possible financial scenario eventuate, there is also the option of mortgage protection insurance.
Should anything happen that affects a borrower’s ability to repay their mortgage, such as death, disability or serious illness, the borrower can rest easy — safe in the knowledge that they are protected.