Buying a new home can be exciting and often people fail to consider what might happen if there is a problem within the family or an inability to work for even a short period of time.
We all know that we should plan for the unexpected, but people can often overlook this when they are so focused on the new home.
Your Mortgage Is A Big Commitment
When you buy a home you are buying a very expensive asset, but in most cases are also taking on a very large and long-term financial commitment – your home loan.
The loan repayments might use 40% of your income – it is very significant.
It can be a bit scary at times too!
So to make things a little easier most people like to consider the risks and put a “what if” plan in place to provide certainty.
The Key Property Risks
The property risks are those about the actual house and land rather than your mortgage.
Your mortgage broker and solicitor will help you assess these and refer you to the specialists.
When you buy a home you will assess the property and many people have a builder look at the property or property inspection carried out by a specialist in this area. This had become more common in recent years since the whole “leaky building” issues have been more commonplace and especially with plaster homes.
It is also advisable to get a LIM (Land Information Memorandum) for any property. This should contain anything that may be unseen which effects the property such as drainage, proposed development etc.
Most other property risks are covered by house insurance which in New Zealand is required by law if you have a mortgage and also contains an earthquake and war damages levy which has recently saved many families in Christchurch from financial ruin following the earthquakes there.
The New Zealand Government also stepped in to provide certainty for families and business owners.
If you want to provide certainty for you and your family then you need to consider the risks and look at what you can do to minimise them. Of course it is hard to cover all the potential risks, but you should at least think about what you could do, or what you would do.
We refer to human risks as the things (risks) that could happen to you as borrowers.
Here are some human risks that you should consider when you have a home loan;
Death – obviously death of a borrower is going to have a huge affect on the survivors! There is the emotional issues that you would need to deal with, but there is also the financial impact of losing an income which will no doubt make it hard to pay the mortgage repayments.
Injury – an injury in itself is not necessarily a huge risk, but if the injury means that you cannot work and therefore earn money then this can impact on your ability to pay your mortgage. We are fortunate in New Zealand that we have ACC (Accident Compensation Corporation) which provides injury cover including income cover should you have an accident within New Zealand.
Illness – there are many illnesses that people get that are short-term and might require a few days off work; however there are also a number of serious and potentially long-term illnesses that might really affect your ability to work and therefore your ability to earn an income.
Redundancy – many people will face the possibility of being made redundant at some stage in their working lives. There are some industries where this is more prevalent, but the reality is most jobs have this risk. The difference with being made redundant (compared to injury or illness) is you are still physically able to work and therefore you could probably find a job and at least earn some income.
All of these four situations can be covered with a comprehensive mortgage protection cover. Of course, to provide certainty you need to get the right cover and ensure you have the most suitable policy.
There is another human risk that would be difficult to insure;
Divorce – unfortunately a lot of marriages will fail. When a relationship fails there is the financial impact of having to continue to pay the mortgage repayments while one person may no longer be contributing to them. Of course this can also have a lot of emotional pressures that can add unforeseen issues that no amount of insurance cover can deal with.
Why Mortgage Protection Insurance Is Important
Mortgage protection insurance is an insurance cover designed specifically to address the human risks of having a home loan and it therefore is easy to know what you have this insurance cover for.
With so many people trying to sell you insurance things can get quite confusing.
As an insurance adviser I have seen people that have multiple insurance policies that they are paying for; however at the time when they need to make a claim they will only be paid from one – the rest are really a waste of time!
Insurance is designed to provide certainty at claim time.
You are better to have a simple insurance program with a good insurance adviser to help explain the risks and ensure that you are properly covered.