What is Mortgage Insurance?

So you have to pay a large sum of money to secure your loan, and the lender tells you it's called Mortgage Insurance. Why do you pay it and how does it protect you?


Mortgage Insurance

Whenever you borrow more than 80% of the value of your property, you pay Mortgage Insurance. So what is Mortgage Insurance and how does it protect you?

Mortgage Insurance is what the lender pays to an insurance company to insure your loan, just in case somewhere down the track, you decide to stop making payments.

If the lender needs to see your property, whatever the shortfall is between the net sale price and the outstanding loan amount, they will claim from the Mortgage Insurer.

Okay, so how does this protect you? Simply put... It doesn't. The lender makes you pay the premium for the policy, which, depending on the loan size, can be upwards of $20,000... but it gives you no protection whatsoever.

The only person protected by Mortgage Insurance, is the lender.

So, how much is Mortgage Insurance? The way to work it out, is that the closer you borrow to 80% of the value of the property the less you pay. And the closer you borrow to 95% of the property, the more you pay.

For example, if your Purchase Price is $400,000, and you borrow 85% of the value - $340,000 - you're up for around 1% of the loan amount - $3,400.

If your Purchase Price is $400,000 and you borrow 95% of the value - $380,000 - you're up for around 3.3% of the loan amount - $12,540.

The percentage charged varies from lender to lender. And as the loan amount gets higher, so too does the percentage.

So, please don't think that because you pay a whopping Mortgage Insurance premium to the lender when you set up your loan, that in some way, somewhere down the track if ever you get into trouble, that you're protected... because you're not.

Thanks to your investment in the Mortgage Insurance policy when you take out your loan... the lender is the only one who can sleep well at night.