Mortgages: Is a bigger one better?

House prices are sky rocketing with Sydney and Melbourne in particular experiencing significant growth, yet at least 60 per cent of Australians lack the insurance cover to pay their mortgage if something unexpected happens.

In New South Wales the average mortgage is now around $544,000 and in Victoria its reached $439,000. However, a recent study by ASIC found up to 60 per cent of families with dependents didn't have sufficient life insurance to financially care for the family for any more than 12 months should the main breadwinning parent die.

Many homebuyers rush through the home loan process and ignore one of the most important questions. If you couldn’t work, who in your family would pay the home loan?

Accidents and terminal illnesses are not something people like to think about. However, at least 20 per cent of Australians between 21 and 64 will suffer some unfortunate event in their lives that will leave them incapable of working.

A mortgage is generally the biggest debt a person will take on in their life. When you consider that just about every car owner has car insurance, it’s amazing that so many Australians are inadequately insured when it comes to their home, their mortgage and providing for their family.

Insurance policies should begin at settlement, when you take ownership of the property. This is when you take on the risk of owning the property and repaying the mortgage. With home and contents insurance, some people deliberately underinsure their house, to save on premiums. This is asking for trouble.

At settlement of the property sale, you should also have life insurance products – call them debt-repayment policies, if you’d prefer. They cover death, incapacitation and terminal illness. But the most crucial aspect of these insurances is that they insure your income. Life insurances keep food on the table, bills paid and a roof over your head.

In the case of the breadwinner passing away, death benefit polices allows for a lump sum for your dependents to pay off the mortgage and to care for your family. Death benefit policies can include Total & Permanent Disablement (TPD) cover, which is a lump sum payable to your dependents if you have an accident and are unable to work again.

Be careful with the temptation of buying the cheapest insurance. Often this means the policy doesn’t cover you for as much money, or in as many circumstances, as full-priced policies might. The $100 per year you saved won’t seem so great when you have to use your policy.

If you use a financial planner or insurance broker to source your insurance, they should make sure you have adequate cover and that the cover is upgraded as your circumstances change. But this is something you can also research yourself.

Australians expect their home to provide wealth and security, and that means guarding against risk. So as house prices and mortgage sizes increase, remember to make settlement day your insurance day.

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