Jane Dotson
Mortgage insurance in New Zealand is a type of insurance that protects you in the event that you can't work due to injury, illness, or unemployment. It is designed to ensure that you can continue to meet your monthly mortgage payments. There are two main types of mortgage insurance: mortgage repayment protection insurance and lenders' mortgage insurance. The former is similar to other types of personal insurance, such as life cover and income protection, and is designed to provide financial support if you can't work. Lenders' mortgage insurance, on the other hand, protects the lender from the risk of the borrower defaulting on their mortgage repayments. This type of insurance is typically required when the house deposit is less than 20% of the property's value, and the rate is usually higher in this case.
| Characteristics | Values |
|---|---|
| Types | Mortgage repayment protection insurance, Lenders’ mortgage insurance |
| Purpose | Protects the lender from the risk of defaulting on mortgage repayments, provides peace of mind to the insured |
| Coverage | Illness, injury, unemployment, death, disability |
| Cost | Depends on the size of mortgage repayments, waiting period, payment period, deposit amount |
| Deposit amount | LMI is usually paid when the house deposit is less than 20% of the property's value |
| LMI rate | Higher for smaller deposits |
| Redundancy cover | Available as an optional benefit with some insurers |
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What You'll Learn
Lenders' mortgage insurance (LMI)
LMI is typically required when the borrower has a high loan-to-value ratio, often when the house deposit is less than 20% of the property's value. In this case, the borrower will likely have to pay higher standard rates, with LMI on top. The cost of LMI can be charged as extra interest or a one-off charge on top of the mortgage, ranging from 0.25% to 1.5% per annum or a 2% premium on the loan amount.
The purpose of LMI is to protect the lender against potential financial loss if the borrower defaults on their loan repayments. If the borrower cannot meet their repayments and cannot come to an agreement with the lender, the property may be sold to cover the outstanding loan amount. However, if the property is sold for less than the amount owed, the lender can make a claim with the LMI provider for the shortfall. It's important to note that the borrower still owes the shortfall amount and may have to repay it to the insurer.
LMI can help first-time home buyers secure a mortgage without needing a 20% deposit, which can be challenging to save. By providing protection to the lender, LMI reduces their risk and makes them more likely to approve a loan with a lower deposit. However, it's important for borrowers to understand that LMI protects the lender and not themselves, and to consider their options carefully before taking out a mortgage with LMI.
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Mortgage repayment protection insurance
Mortgage protection insurance is similar to other types of personal insurance, such as life cover and income protection. It is usually optional and can be customised to match your specific needs and circumstances. You can choose the amount you want to protect, which is usually matched to your ongoing repayments, along with a "wait period" and a "payment period".
During the wait period, which can be customised to suit your needs, you will not receive any benefit payments from the insurer. Once the wait period has ended, the insurer will start making monthly claim payments to cover your mortgage repayments. These payments will continue until you are able to return to work or until the end of your chosen payment period, whichever comes first.
In addition to covering illness and injury, some insurers offer redundancy cover as an optional benefit. This means that if you are made redundant, the insurer will cover your monthly mortgage repayments for a specified period, providing you with financial support during your time of unemployment.
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Mortgage protection insurance
In New Zealand, you will normally have to pay for Lenders' Mortgage Insurance (LMI) when your house deposit is less than 20% of the property's value. The smaller your deposit, the higher your LMI rate. LMI protects the lender from the risk of the borrower defaulting on their mortgage repayments. If you can no longer afford your mortgage payments, the lender might sell your home to recover what they are owed. LMI is often called a "low equity margin" (LEM) or "low equity premium" (LEP).
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Mortgage insurance and house deposits
In New Zealand, the standard deposit for a house is 20% of the property's value. This rule was established after the Global Financial Crisis to safeguard both homebuyers and lenders. A large deposit proves to the bank that the buyer is financially stable and committed to homeownership. It also reduces the buyer's overall loan and lowers their monthly payments. For lenders, a large deposit serves as a buffer in case the buyer defaults on their mortgage and the lender has to sell the house at a loss.
However, it is possible to purchase a house in New Zealand with a smaller deposit. The First Home Loan scheme, for instance, requires only a 5% deposit. Introduced by the NZ Government, this scheme makes it easier for eligible buyers to secure a mortgage with a low deposit. Other lenders may also offer 5% deposits to borrowers with excellent credit and stable, high incomes.
If you take out a mortgage with a deposit of less than 20%, you will likely have to pay a higher interest rate and lenders' mortgage insurance (LMI). LMI, also known as a low equity margin (LEM) or low equity premium (LEP), protects the lender from the risk of the borrower defaulting on their repayments. The smaller the deposit, the higher the LMI rate. LMI is usually charged as a one-off fee added to the mortgage, typically between 0.25% and 2.00% of the loan amount. However, it can also be charged as a low equity premium on the interest rate, ranging from 0.25% to 1.25% per annum, or up to 2%.
Mortgage protection insurance is another type of insurance that covers your mortgage repayments if you become unemployed, disabled, or unwell for an extended period. It can also provide cover for your partner if you die. This type of insurance is flexible and low-cost, allowing you to choose the amount you want to protect, a "wait period", and a "payment period".
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Mortgage insurance and life insurance
Mortgage protection insurance is a low-cost way to ensure that you do not lose your home in the event of unforeseen circumstances. It is usually optional and provides peace of mind, as your mortgage repayments will be covered if you become unemployed, disabled, or unwell for an extended period. It can also provide cover for your partner if you pass away.
Mortgage protection insurance is usually made up of life insurance and mortgage protection. Life insurance is a simple policy where the insurance company will pay out a lump sum if you die or are terminally ill. You can insure any sum you like, whether it is to match your mortgage or add extra cover, for example, to take care of debt or provide a replacement income for your family. Life insurance covers any cause of death, such as sickness or accident. The only standard exclusion is suicide within the first 12 to 13 months of setting up the policy.
Mortgage protection insurance, on the other hand, protects you if you cannot work due to health reasons. You can choose an amount to protect, usually matching your ongoing repayments, a "wait period", and a "payment period". Once your wait period is finished, your insurer will make monthly claim payments until you can return to work or the end of your payment period, whichever comes first. Aside from exclusions such as suicide within the first 12 months, any health issue that keeps you off work is covered. You can also add cover for redundancy with some insurers, although this is not standard.
In New Zealand, you will usually have to pay for lenders' mortgage insurance (LMI) when your house deposit is less than 20% of the property's value. The smaller your deposit, the higher your LMI rate. LMI protects the lender from the risk of you defaulting on your mortgage repayments. If you can no longer afford your mortgage payments, the lender might have to sell your home to recover what they are owed. If you have a low deposit mortgage, the sale price might not cover the remaining balance.
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Frequently asked questions
Mortgage insurance is a type of life insurance that ensures your mortgage repayments are covered if you become unemployed, disabled, or unwell for an extended period. It can also provide cover for your partner if you pass away.
There are two main types of mortgage insurance: mortgage repayment protection insurance and lenders’ mortgage insurance.
Lenders’ mortgage insurance (LMI) protects the lender from the risk of the borrower defaulting on their mortgage repayments. If the borrower can no longer afford their mortgage payments, the lender might have to sell the house to recover what they’re owed.
You’ll normally have to pay for LMI when your house deposit is less than 20% of the property’s value. The smaller your deposit, the higher your LMI rate.
Mortgage repayment protection insurance covers your mortgage instalments if you become sick, injured, or disabled and are unable to work and pay your mortgage.
