YBR

Do you really need to work to pay down your home loan?

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One in three households has a home loan and Australians owe $1.45trillion in mortgages yet at least 60 per cent of Australians lack the insurance cover to pay their mortgage if something unexpected happens.

Taking out a loan requires a regular income to make repayments, meaning the borrowers needs to be consistently employed.

So you may ask yourself why some purchasers negate to lock in insurance cover to protect their ability to cover the loan when so many of us have hundreds of thousands of dollars owing, and an income that is critical to paying off that loan.

The average national house value is $612,200 and the average size of new mortgages nationally $444,000. In NSW the average mortgage size was the highest at $544,000, followed by Victoria at $439,000, WA at $428,000, NT at $375,000, Qld at $374,000 and SA at $349,0001.

I guess the question is: what if you couldn’t work? What would happen to the property you’re paying off?

A recent study by ASIC showed that underinsurance is still a serious problem in Australia. The study 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 to settlement and ignore one of the most important questions. If you couldn’t work, who in your family would pay the home loan?

Unforeseen accidents and terminal illnesses are not possibilities many people like to consider. However, a ‘no worries’ attitude can be dangerous.

It’s reported that 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 and in cases of illness; there was no history in the immediate family.

A mortgage is generally the biggest debt a person will take on in their life. No one should be taking on a mortgage without covering their risk.  

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 and providing for their family.

For those that do get insurance, I find that some still deliberately underinsure their house. If you do this, you could be headed for trouble if you needed to draw on that insurance. For instance if you take out 10 per cent less than the value, when an insurer comes to pay you – they actually in practice will only pay 90 per cent of the policy that you are insured for. In other words, make sure what you insure your house for is accurate.

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.

No one likes to talk about life insurance products, so perhaps we can call them debt-repayment insurance?

Yes, they cover death, incapacitation and terminal illness. But one of the essential properties is to ensure household debt can be repaid.

The most crucial aspects of these insurances to get right from the beginning, is the one that insures your own income. It keeps 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.

 

1As at December 2014

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