What Is Mortgage Protection Insurance?

Mortgage protection insurance (MPI) could help cover your repayments if you lose your job or become incapacitated through sickness or injury.

How does mortgage protection insurance work?

Mortgage protection insurance is designed to cover your home loan repayments if you cannot work. Like other insurance products, the mortgage holder pays a premium at the start of the mortgage and makes regular payments over its full term.

For example, if you are made redundant, have unforeseen health issues or are injured and unable to work, your insurance covers your repayments over that period. Additionally, if you pass away, the insurance would pay off the rest of your mortgage, so your loved ones do not have to pay off the remainder of the loan.

How the insurance is paid out will depend on your circumstances and risk as a customer. You may receive a lump sum repayment for long-term issues or monthly instalments to cover your repayments for the short period you cannot work.

🤓 Nerdy Tip

MPI is a type of consumer credit insurance (CCI). A 2019 Australian Securities and Investment Commission investigation found that many MPI products were overpriced or unfairly sold or that issuers incorrectly denied claims. You may be entitled to a refund.

How much does mortgage protection insurance cost?

Some lenders — such as ANZ Bank and Aussie Home Loans — offer MPI when you take out a home loan. You can also obtain mortgage protection insurance from regular insurance providers.

How much MPI costs depends on factors such as:

The insurer
The size of your home loan
The level of cover you choose
Your age.

» MORE: How to get a home loan

Mortgage protection insurance coverage

When considering MPI, it’s important to read the contract terms carefully. Each insurer will offer different cover depending on your circumstances.

Mortgage protection insurance may cover:

Unforeseen health issues. Should you become seriously ill and are unable to work, MPI may cover your repayments during this time. Each insurer will assess illness and what qualifies as being too sick to work differently.
Unemployment. If you are made redundant, MPI may cover your mortgage repayments for some time.
Injury. If you have an accident and are physically unable to work, MPI may cover your repayments during your recovery.

MPI will cover some or all of these, depending on the coverage you choose.

Making a claim

If you experience one of these issues, you can contact your insurer directly to make a claim. You will need to provide details of the circumstances, such as medical forms.

If your claim is successful, you will then need to wait for it to be processed. Depending on your insurer, this can take 30 days or more.

» MORE: What is income protection insurance?

How much coverage do you need?

The amount of coverage you need will depend on your lifestyle, income and job security. A home loan can take 30 years to pay off, so if you decide to take out MPI, it’s important to understand how much you can pay over the course of the loan.

Lenders may give you a quote for insurance paid monthly. For example, $50 a month may seem affordable for a home loan. However, that would equate to $600 a year — or $18,000 for a 30-year loan. Be sure to research products from multiple insurers before taking out insurance and carefully read what you are covered for.

Is mortgage protection insurance worth it?

Advantages

You prevent defaulting on your loan if you’re unable to work.
You can choose the cover for what you are most at risk of.
You can potentially take out MPI with your home loan lender, making your repayments more convenient.

Disadvantages

As a product, MPI is a type of consumer credit insurance (CCI). A 2019 Australian Securities and Investment Commission investigation found that many MPI products were overpriced or unfairly sold or that issuers incorrectly denied claims. This investigation illustrates the risk customers take by paying for some insurance products.
If your property loses value, you still have to pay premiums based on its purchase price.
You could pay expensive premiums and never end up needing MPI. So, you could ‘lose’ that money spent throughout your loan.
If you need to make a claim, you may have to wait for it to be processed. So, even though you have been paying insurance, you could still be under mortgage stress.

Other ways to protect mortgage repayments

If you are concerned about your ability to make your mortgage repayments in the future, there are other types of insurance you may consider.

Income protection. This policy is designed to cover up to 90% of your income should you get sick or suffer an injury that stops you from working. Payouts are calculated based on your income for the 12 months prior to your inability to work rather than on your mortgage repayments.
Life insurance. Pays a lump sum to your dependents or loved ones should you pass away. You may also have life insurance through your superannuation.
Trauma insurance. This type of insurance pays a lump sum should you be diagnosed with a critical illness such as cancer, heart condition or head injury.
Total and permanent disability. Pays a lump sum should you become permanently disabled due to illness or injury.
Redraw facility. A type of home loan feature that allows you to pay off more than your minimum repayments to get ahead on your home loan and withdraw that money should you need to. These extra funds may help cover your repayments if you cannot work.