Do I Need Mortgage Insurance If I Have Savings?
Many kiwis do not like paying for any insurance and both insurance advisers and mortgage brokers will often be questioned on the reason for mortgage insurance, and especially when people claim to be able to live off their savings in times of need.
The first and most obvious question is why have any borrowing if you have savings?
Of course having access to money is great and can lessen the need for insurance or for having as much insurance, but for most people there is still a need for some insurance.
Let’s Look At Why We Have Mortgage Insurance
People take out mortgages primarily to fund the purchase of a house, and in most cases that house is their home.
They get their bank or a mortgage broker to arrange a mortgage (home loan) as they do not have enough money saved to fund the purchase. The mortgage is generally a large amount and is paid back over a considerable length of time – it’s generally not a small short-term loan. So what we are saying is this is a large and long-term financial commitment and it’s reliant on you having an ongoing income to meet the repayments which is the commitment that you have made to the lender.
So what happens if you are unable to work – by this we mean having a short-time off work, maybe a long spell off work or to work again ever.
Short-time off work – if you cannot work for a few days or a few weeks then you can probably use any sick leave that you are entitled to (if you’re off work sick) or use up any holiday pay that is owed to you. Once that is used you may then have some savings or a facility like a revolving credit facility on your home loan that you can use. Some banks do have an option of a mortgage holiday for up to 3-months and this can help in these times of need. Your mortgage broker can advise you if your bank has this option and how it works, and then if you feel its needed then discuss with your broker and they can help you get a mortgage holiday.
A long-time off work – if you are off work for a few months or years then most kiwis will have exhausted their leave entitlements and savings. Some people may have family that they can get help from and in New Zealand we have ACC that can in some instances help; however it would not be prudent to rely on this. This is really where having some mortgage insurance becomes vital to not only cover your mortgage repayments but to give you money to live on too. If you can afford to cover 3-months from savings or getting a mortgage holiday then you can structure any mortgage repayment cover with a longer waiting period (3-months) and this helps reduce the cost of this type of insurance.
Never able to work again – again, like being off work for a long-time this is where having some mortgage insurance is vital. Some of the more comprehensive policies have a benefit that pays out a lump-sum in the event of total and permanent disablement and this can be used to get rid of a large chunk of the mortgage or hopefully pay off the whole amount. Total and permanent disablement is also one of the cheapest forms of cover and while you hope that you will never need it, this is something worth discussing with your adviser.
Get Good Advice Early
You always want to get advice and then get insurance in place as early as possible.
The earlier you get insurance the less likely it is that you will have health issues that will mean it costs more or is unavailable to you. There are also some types of cover that have stand-down periods whereby you cannot make a claim until the policy has been in-force for a period of time.
It’s not uncommon to hear of people that “were going to get around to arranging mortgage insurance” after it’s too late.
Don’t be one of those people!
Even if you have some mortgage insurance it’s always a good idea to get someone to review it for you.
