Have you ever wondered why banks sell you mortgage cover?
You Have Just Got A Mortgage
You have just gone through the process of getting a mortgage so that you can buy your new home and while you are exited and grateful to have been approved for the home loan, you are now being asked about mortgage cover.
It seems like a good idea… but do you really need the mortgage cover that the bank are suggesting?
Did You Want A Mortgage?
Of course you did not want a mortgage, but you did want the new home!
Unfortunately for most people a new home does not come without a home loan. This is especially true for first home buyers, but the reality is that most people will be paying off a home loan for the majority of their working lives and sometimes beyond this too. It is not that anyone wants a home loan, but we do not have the cash available to us and therefore the only way to get that new home that we want is to borrow the money from a bank or some other non-bank lender.
Having Debt Increases Reliance On Income
With a home loan comes a commitment to meet regular loan repayments and therefore a reliance on our ability to earn income. If we fail to pay the mortgage then we risk having the home sold as the lender needs to recover the money that they lent to us.
We know that we can pay the repayments – now.
But want happens to the repayments if we die or even if we are just unable to work for a prolonged period?
This is a real risk and something that you need to consider.
What Happens If You Die?
A bank will always try to sell you mortgage cover with life insurance so that there is enough money to repay your mortgages if you were to die. This is often seen as a prudent thing to do too as it means the house is paid off and therefore the bank no longer need to be concerned about who will be paying the repayments.
If you have family then it may be nice to leave them with a freehold home, or at least with a smaller and more manageable home loan, but this is not always needed.
The questions you need to ask are;
- Would the surviving family be able to afford if you did die?
- Would they even want to stay in the same home?
If you are single or have no dependents what would happen – would the house be sold in which case the mortgage can be repaid when it is sold and everyone can get paid then.
Just because you have a mortgage does not automatically mean you need to have mortgage cover.
The hope is that we will all have our mortgage paid off many years before we pass away. That will be the reality for most of us, but there are occasions when people die too young and it is for this that you might consider some life insurance.
What Happens If You Cannot Work?
This is a far greater risk – the inability to work and therefore the loss of your income.
When you are fit and healthy you are able to work and pay your mortgage repayments, but this can all change very quickly if you fall ill or have a major injury.
What happens to your finances when you are unable to work?
Most people rely on their income to live and to pay the expenses which include your mortgage repayments. When that income suddenly stops your finances can quickly turn bad.
Sick pay – most employees have some sick pay which helps cover costs for s short time, typically up to 2-weeks
Savings – how much savings have you got? You can use your savings to help cover costs, but they will run out if you are unable to get back to earning money.
Mortgage holiday – most banks will allow you a mortgage holiday for up to 3-months. This means your repayments are not required and instead the interest is added to your mortgage.
ACC entitlements – you may be able to claim a benefit from ACC if you are not working due to an accident which happened in New Zealand and was accepted by ACC.
Income protection insurance – if you have an income protection insurance policy then you can claim on that.
Passive income – some people will have investments or business interests that produce passive income which would continue regardless if you are able to work or not.
Could your finances cope with what you have available?
If your income stopped when you are unable to work and you do not have a passive income then you should be considering some form of income protection insurance.
There are many types of income cover, and some mortgage cover options have a mortgage repayment cover that can be included. Make sure it is as often the banks do not suggest this and only include the life insurance.
The Best Mortgage Cover
Of course the best mortgage cover is having a small or no mortgage at all and this is what we all strive for.
With the right mortgage structure and a debt reduction plan you can pay your mortgage off much more quickly and therefore lessen the risks much more quickly too. With a little planning and effort many people will be able to pay their mortgages off in half the time!
Speak to a mortgage broker who will be able to show you how.
The other way to protect yourself is to have a passive income.
This can be achieved from investment, but often that takes quite a long time to establish large enough investments and by that time your mortgage is probably paid off too.
With the internet it has become more popular to create online income that can be set up on autopilot. This is another way to protect yourself and it also creates additional income so you can pay your mortgage off faster.
Of course creating any passive income takes a little work or investment initially, but the results are very worthwhile.
Comparing Mortgage Cover
Not all mortgage protection insurances are the same.
Obviously some of the mortgage cover includes repayment cover while others are just straight life cover, but there are also many subtle differences that can make a huge difference at claim time.