How mortgage insurance works

Your mortgage is possibly the largest expense you will ever face, but what happens when you can no longer meet up with your payment responsibilities? There are lots of things that could go wrong before you pay up your debt – you could fall seriously sick, lose your job or be injured in an accident, and while your lender will surely feel sorry about your situation, you will still have to make your repayments or risk losing your home.

What is mortgage insurance?

Mortgage insurance or mortgage protection insurance makes it possible to meet your mortgage repayment responsibilities despite your financial difficulties, particularly when you are no longer able to earn an income.

Mortgage insurance is typically broken into 3 types:

  • employment only mortgage insurance
  • sickness and accident only mortgage insurance
  • and a combination of both

The cost of mortgage insurance is based on a number of criteria such as your age, health status and the cost of your mortgage repayments. In the event of serious illness and accident or involuntary unemployment, a typical mortgage protection insurance will cover your mortgage payments for up to two years and will pay about 65% of your monthly income. There are also other policies that account for sudden death where the remaining mortgage payments are covered at the death of the breadwinner. This can be a huge relief from unwanted debt in the event of financial difficulties, providing much needed help when you need it.

Calculating payments

When you invest in mortgage insurance, you are entitled to make a claim that would help you pay your mortgage repayments every month, typically for a period of two years. Depending on the exact policy you opt for and the provider, you can also choose how you want the payments to be made. For example, you can opt for a policy that covers just the cost of your mortgage or one that covers the mortgage and other loans. If you choose to go with the latter, you can expect the insurer to pay at least 125% of your mortgage costs. You can also choose a policy that is based on your salary. In this case, the insurer typically pays between 50 to 65 percent of your monthly salary. Properly prioritized, this should be enough to manage your important debts.

Making a claim

Before you can make a claim, you will have to be away from work for a specific number of days. This is known as the waiting period and is usually between one month and three months. The longer your provider’s waiting period is, the cheaper the policy is likely to be. If you are unable to work due to illness or injury, you may want to take advantage of your employee benefits during this period.

Mortgage insurance can be a huge help when you find yourself in a tight corner financially due to circumstances outside your control, but there are also a number of alternative that could be well suited to your needs. They are: