Buying a home is one of the biggest financial decisions you will ever make so it's important to have cover in place to protect this purchase.
While lenders won't demand you have life insurance to get a home loan, it can be a crucial part of your financial planning and security for the future when taking on such a large debt.
It can be tricky to know how much – and what – insurance you require when you buy a property. You may not know what type you need or the difference between home loan protection insurance, income protection and life insurance.
A good starting point is to ask yourself a few questions:
- What if my partner/spouse died or was unable to work?
- What if I suddenly couldn't work?
- What if our savings run out and we can't pay the home loan?
These scenarios are important to think about because if you're unable to cover home loan repayments without a regular wage, there's a risk you could lose your home.
High levels of household debt a concern
Australia has one of the highest personal debt levels in the world. According to the Australian Bureau of Statistics, average household debt grew by 7.3 per cent to $261,492 in 2021-22. And the Reserve Bank of Australia has found Australia has a household debt to income ratio of nearly 200 per cent, with much of the debt being home loans. That’s nearly double the amount of money that households owed per year compared to what they’re bringing in. This is a big gap to cover if earning capacity suddenly changes and households don’t have insurance in place to cover home loan repayments.
In addition to high levels of personal debt, the Australian Bureau of Statistics says the national average home loan size is $586,700 and a weakening economy could present a danger to home loan holders, especially if unemployment rises. So it makes sense to have protection in place for a number of reasons. But what is the most appropriate insurance to have?
Life insurance, income protection and home loan protection explained
ANZ Regional Manager Mobile Lending Simone Geronimi says many borrowers believe they already have the correct insurance through their super.
"Many people believe they automatically have income protection cover in their super but this is not necessarily the case. Often what they have is just life insurance," she says. "They are not protecting their ability to earn an income. I don't think there is enough public awareness out there about the different types of insurances and what they are or aren't covered for in the event they could no longer work."
Life insurance pays out a lump sum in the event of death or permanent disability, or in some cases if you are diagnosed with a terminal illness and have a limited life expectancy. But what if you are sick or injured and cannot work? How will you meet your home loan repayments and other expenses? This is where income protection can help.
Geronimi says income protection insurance is based on your income and aims to cover your costs of living if you are injured or ill and cannot work for a while. "You pay an ongoing premium and if you are unable to work due to a claimable event then you receive a monthly payment that you can use towards your living expenses, including your home loan repayments."
Another type of insurance is home loan protection (or home loan repayment insurance), which protects borrowers from the risk of defaulting on their home loan. Payments under this insurance are used exclusively for home loan repayments – not for any other expenses –in the events such as death, injury, illness or involuntary unemployment.
What's Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) protects your lender in the event that you default on your home loan and there is a 'shortfall'. A shortfall happens when the proceeds from the sale of your home are not enough to cover the outstanding amount you owe to your lender. Understand more about LMI.
Find insurance to suit you
While taking out life insurance isn't a requirement to get a home loan, it is worth considering, especially if you're unable to pay off your home loan should you or your partner be unable to work.
Here's a quick checklist to help you get started:
- Ask yourself a few questions such as 'What if I suddenly couldn't work?'
- Calculate how long you could pay your home loan and expenses without an income
- Review what cover you have within your super – is it enough to payout the home loan should you die or become injured or disabled?
- Understand more about life insurance by reading our most frequently asked questions
- Find out what Income Protection covers and some benefits you may not have considered
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