Mortgage protection insurance
The mortgage keeps being paid when the income that services it stops.
What mortgage protection covers
For most households the mortgage is the largest fixed obligation they hold and the one with the least flexibility. Rates change, incomes change, and the repayment is still due on the same day of the month.
Mortgage protection is a general term for two rather different arrangements: a lump sum that clears the loan if you die or are permanently disabled, and a monthly benefit that meets the repayments while you are unable to work. Most people who believe they have mortgage protection hold the first and not the second.
The two arrangements, and what each one does
Lump sum cover is life or TPD cover sized against the loan. It retires the debt in a single payment. It answers the permanent outcomes and it does nothing at all for the temporary ones.
Mortgage repayment cover pays a monthly benefit while illness or injury keeps you from working, and it is designed to meet the repayment rather than to replace your whole income. It answers the far more likely scenario: not death, but eight months away from work.
The two are complementary, and the second is the one more often missing. A household that has cleared the debt through a life claim is in a very different position from one trying to hold the house through a long recovery on one income.
What we look at when arranging it
Who receives the money
Cover assigned to the lender pays the bank. Cover owned by your partner or your trust pays them, and they decide what to do with it. The second gives a household options at a moment when options are scarce.
Level or reducing
Reducing cover follows the loan balance down and costs less. Level cover leaves a surplus for everything else that arrives at the same time.
The wait period
On monthly cover, how long the household can carry the repayment unaided before the benefit starts. This is the setting that moves the price most.
How long it pays
A benefit that runs two years covers most recoveries. A benefit that runs to sixty-five covers the ones that do not end.
Whether redundancy is included
Available from some insurers as an option on monthly cover, and only if arranged before there is anything to worry about.
What happens when you refinance
Cover arranged through a lender does not always survive a change of lender. Cover you own does.
Cover arranged at settlement
Insurance offered alongside a loan approval is arranged at the least considered moment in the whole transaction. The house is bought, the paperwork is thick, and a policy that takes ninety seconds to accept is difficult to refuse.
Some of that cover is perfectly sound. What it has rarely had is any assessment of whether the sum insured is right, whether the ownership makes sense, whether it duplicates cover you already hold, or whether the monthly half of the problem was addressed at all.
If you took cover at settlement and have not looked at it since, bring the policy document. Reviewing what exists is usually the first useful hour of work, and occasionally the only one required.
What shapes the premium
Age, the sum insured or monthly benefit, smoking status, medical history, occupation, and on monthly cover the wait and benefit periods. Because mortgage repayment cover is sized against a repayment rather than a whole income, it is often the most affordable way into proper protection for a household that cannot yet fund everything.
That is frequently where we start. It is rarely where a plan should finish.
At claim time
The mortgage payment falls due on the same day it always did. Nobody at the bank knows anything has happened, and nobody there is going to notice on your behalf.
We lodge the claim in the week of the event rather than the month after, and we make sure you know exactly where the gap falls between the last salary and the first benefit payment, so that any conversation with your lender happens early and from a position of information.
Where the cover was arranged through the lender at settlement, we will also establish who actually receives the money. That answer is not always the one people assume, and it is better found out now than then.
Common questions
Is mortgage protection the same as the insurance my bank offered?
Not necessarily, and the difference is worth understanding. Cover arranged at settlement is often life cover sized to the loan, sometimes with the lender as the beneficiary, and sometimes reducing as the loan reduces. That protects the debt. A monthly mortgage repayment benefit protects the household's ability to keep the house while someone recovers. They solve different problems and many people hold only the first.
How much of my mortgage repayment can I insure?
Insurers commonly cap the monthly benefit as a proportion of your gross income rather than of the repayment itself, and mortgage repayment cover is usually allowed alongside income protection up to a combined limit. The practical effect is that the two can be layered, and doing so is often cheaper than buying income protection alone at the same total benefit.
Is the benefit taxed?
It depends on the policy type. Some mortgage repayment benefits are paid tax free, in which case the premium is generally not deductible; where the benefit is taxable, the premium generally is. Confirm the treatment with your accountant before the policy is issued.
Does it cover redundancy?
Only if redundancy cover is added, and only on the insurers that offer it. It is usually an option on mortgage repayment cover rather than a feature of it, it carries its own stand-down and its own maximum payment period, and it must be arranged while your employment is entirely secure.
Should the cover reduce as the mortgage reduces?
Reducing cover is cheaper, and it makes sense where the only purpose is retiring the debt on a table loan running to term. It makes less sense where you are likely to borrow again, extend, or move. Level cover leaves the surplus available for everything else the household will need, and the price difference is smaller than most people expect.
Cover that often sits alongside this
- Income protection the wider version of monthly cover, protecting income rather than one obligation.
- Life cover where the lump sum half of mortgage protection actually lives.
- Redundancy cover the option that answers the cause mortgage repayment cover does not.
- Total and permanent disablement cover clears the loan where the outcome is permanent.
Talk to us about protecting the mortgage
An initial consultation runs about an hour, in our Garden Place rooms in Hamilton. You sign one thing: confirmation that you have received our disclosure statement and understood it. Nothing else.
This page is general information about how this type of cover works. It is not financial advice for your circumstances. Advice is given after we understand your position. See our disclosure statement.