Mortgage Insurance
Save thousands over the life of your mortgage by picking the right policy upfront
Updated 8 May 2020
A major fear of homeowners around New Zealand is the threat of home repossession if they find themselves unable to pay their mortgage. Mortgage insurance eliminates this risk by taking care of repayments for a set period of time, or until you retire. For many people, it can be an effective product, but many New Zealand homeowners massively overpay by buying expensive cover.
In this guide, we explain what Mortgage Insurance is, what the pros and cons are, highlight FAQs and compare policies available from numerous insurers.
Our guide covers:
In this guide, we explain what Mortgage Insurance is, what the pros and cons are, highlight FAQs and compare policies available from numerous insurers.
Our guide covers:
Looking for life insurance or income protection insurance?
This guide isn't for you - see our guides to life insurance and income protection insurance.
This guide isn't for you - see our guides to life insurance and income protection insurance.
Mortgage Insurance - The Basics
If your biggest asset is your health, having even a short-term illness which causes you to miss work can have significant financial consequences. While ACC will cover you for an injury, illnesses won't be covered, so you will need to find the money to keep up with mortgage repayments. Mortgage insurance covers your monthly repayments should you be unable to make them for as long as your policy states. This covers you for illness, disability, redundancy and mental health conditions, but, like all insurance policies, there are exceptions and exclusions.
How much does mortgage cost?
The table below shows indicative annual policy costs for mortgage insurance for someone earning the average New Zealand salary ($50,000) and paying an average first-home New Zealand mortgage ($2,200) every month, based on a $400,000 loan.
Mortgage insurance costs will vary based on factors such as your age, minimum wait period before claiming, and the cost of your mortgage repayments. If you do need to claim, most insurers will pause the cost of your policy while you're unable to work so that your payouts are not being spent on insurance costs.
Mortgage insurance costs will vary based on factors such as your age, minimum wait period before claiming, and the cost of your mortgage repayments. If you do need to claim, most insurers will pause the cost of your policy while you're unable to work so that your payouts are not being spent on insurance costs.
| Age | Lowest Quote | Highest Quote | Average |
|---|---|---|---|
| 30 Male | $266.35 | $389.33 | $327.84 |
| 40 Male | $336.52 | $491.59 | $414.06 |
| 30 (M/F Couple) | $551.53 | $787.99 | $669.76 |
| 40 (M/F Couple) | $770.52 | $1144.3 | $957.41 |
Data: Quotes and pricing correct as at 8 May 2020. Applicants were males, earning a salary of $50,000, and paying a $2,200 mortgage every month, with a $400,000 mortgage. A waiting period of 8 weeks applies, with a payment period of two years. Average NZ salary sourced from Stats NZ. Average mortgage sourced from NZ Herald (2019 data). Professions selected: 'Accountant (Qualified)'.
Do I need Mortgage Payment Insurance?
Before buying a policy, which is going to cost at least $15,000 to $25,000 over a 25-year mortgage, make sure you need the benefits, and the product is right for you. For those most afraid of being injured at work, ACC provides generous support if you need to take time off work. Additionally, sickness benefits, personal savings, WINZ support and existing insurance policies may step in to provide a safety net similar to mortgage insurance.
1. Sickness benefits – WINZ benefits are minimal, at around $100 to $150 per week, but if you’re unable to work due to illness, you can apply to receive the payment. While it is unlikely to cover your ongoing mortgage payments, we have included it here as a factor for consideration when looking for a policy.
2. Sick leave entitlements – your employer may have a generous sick leave policy, and often those who have worked the longest receiving more extended sick leave allowances. Before buying any mortgage insurance policy, find out what your sick leave benefits are.
3. ACC payments – if you’re more concerned about an injury than developing an illness, ACC covers up to 80% of your income as weekly compensation if you’re unable to work because of a covered injury. This means you can keep up with your mortgage while you recover.
4. Existing insurance – if you have existing income protection insurance and/or health insurance, you may be able to put payments from these policies towards your mortgage repayment. Income protection should offer significant benefits and assist with mortgage repayment. For health insurance, some policies provide lump-sum payments upon a diagnosis to help with family expenses, such as mortgage repayments. However, these benefits are only paid once per claim.
1. Sickness benefits – WINZ benefits are minimal, at around $100 to $150 per week, but if you’re unable to work due to illness, you can apply to receive the payment. While it is unlikely to cover your ongoing mortgage payments, we have included it here as a factor for consideration when looking for a policy.
2. Sick leave entitlements – your employer may have a generous sick leave policy, and often those who have worked the longest receiving more extended sick leave allowances. Before buying any mortgage insurance policy, find out what your sick leave benefits are.
3. ACC payments – if you’re more concerned about an injury than developing an illness, ACC covers up to 80% of your income as weekly compensation if you’re unable to work because of a covered injury. This means you can keep up with your mortgage while you recover.
4. Existing insurance – if you have existing income protection insurance and/or health insurance, you may be able to put payments from these policies towards your mortgage repayment. Income protection should offer significant benefits and assist with mortgage repayment. For health insurance, some policies provide lump-sum payments upon a diagnosis to help with family expenses, such as mortgage repayments. However, these benefits are only paid once per claim.
5 Mortgage Insurance Must-Know Facts
- Banks love to sell mortgage insurance, but it's not compulsory with a mortgage - banks are not known for selling the most affordable insurance, and won't like it if you compare prices. But you don't need to buy ANY insurance policies when getting a mortgage.
- Mortgage payments are capped - if you have a large mortgage, i.e. over $1m, you may find yourself needing additional cover. For example, LifeDirect limits cover to a maximum of $5,000 per month.
- The wrong cover can be very expensive in the long-term - if you're planning to take out a policy for at least 10 years, overpaying by even $250 per year can add up.
- ACC covers you for injuries - if you work in a trade or outdoors and are more at risk of injury than illness, ACC can cover up to 80% of your regular income while you recover. You're then free to pay your mortgage with the benefits received.
- Mortgage insurance is flexible - with most policies, you can insure for 2 or 5 years of mortgage payments, or mortgage payments up to the age of 65 or 70. Understandably, the shorter the cover period, the lower the cost of insurance, and vice versa. The number of weeks you select before receiving payments also alters what you'll pay, with some policies offering up to 13 weeks.
Mortgage Insurance FAQs
To make things clear, our list of FAQs below covers the key essentials of how mortgage insurance works and what it covers.
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Do I need a mortgage insurance policy?It depends – everyone is different, and you will need to evaluate your needs. Buying mortgage insurance cover can be useful for giving peace of mind when you lose your ability to earn. The policy is designed to help you meet your mortgage repayments until you return to work. The level of cover you buy affects the policy cost.
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When does a mortgage insurance policy payout, and what am I entitled to?Each policy has an excess period, which is the amount of time you need to wait before being entitled to payment – usually a set number of weeks. If you have an 8-week excess period, you would receive your payments 56 days after submitting a claim. If you were to take an 8-week excess period, you would need around two months of mortgage payments saved up to cover the period you’re not earning. If this isn’t realistic, then taking a 4-week excess (or less) is possible more suitable.
Your entitlements will be what you agreed to, usually a set amount per week, fortnight or month. If you receive sick leave payments of welfare entitlements, your insurance payouts should not be affected (but each insurer is different). ACC compensation, for example, may be taken into consideration when the insurer is making payments. |
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What are the exclusions for mortgage insurance cover?It’s essential you understand the fine print of any policy you buy. Generally, common exclusions include:
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At what age can I get mortgage insurance cover?Most insurers will offer cover if you are between 18 and 65, but there are minimal work hour requirements. You can be employed or self-employed, and couples can buy joint policies.
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How much will I receive each month?The amount that is paid out will depend on the cover level you select. Insurers allow up to 110% or even 125% of your mortgage costs. This is designed to cover other home-related expenses, such as electricity bills, internet and council rates.
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How long will a policy pay my mortgage for?It depends, but usually payments will be for 12 months, 2 years, five years, to the age of 65, or the age of 70. It is possible to get cover for shorter periods. As is the rule with insurance, the more generous the benefits, the higher the premium cost. Getting the right balance between affordable and suitable benefits takes a bit of planning. Our best buy policies (LINK) outline the best deals available right now.
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How easy is it to cancel or switch policies?Some mortgage insurance policies have wait times, avoiding the risk that someone signs up on Monday and claims on Friday etc. You can switch, but if you become unable to work in the wait time of your new policy, you will need to cover mortgage payments yourself. Furthermore, any pre-existing conditions may not be covered, meaning your cover is a lot less. Switching may seem like an easy way to save money, but it can have significant consequences.
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What happens if I die while receiving mortgage protection insurance payments?If you die or receive a terminal diagnosis, some policies will offer a ‘bereavement support benefit’ to help you plan for the future. As an example, in the case of Sovereign’s policy, if the policyholder is diagnosed with a terminal condition that is likely to cause death within 12 months, the insurer pays three times the monthly benefit. However, this is a one-off payment. Unlike life insurance, mortgage insurance only covers your mortgage while you are living – it’s designed to meet mortgage repayments until you’re well enough to return to work. It’s not intended to pay out lump sums to clear a mortgage.
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What happens if I can work part-time, but unable to work full-time?The benefit your policy pays out will be adjusted. For example, if you are able to work 20 hours per week while partially disabled, and previously worked 40 hours per week on average before becoming disabled, then, in most cases, you will receive 50% of your mortgage payment.
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Will I be covered if I am made redundant?Redundancy is, generally, not a standard covered event when it comes to mortgage insurance. However, some insurers offer it as an optional benefit. If this is important to you, look for an insurer who offers it.
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Mortgage Insurance - Costs and Best Buy Policies
To understand the quotes currently available to everyday New Zealanders, we selected X of the major mortgage insurance providers and obtained quotes for six different profiles:
Disclaimer: Specific Mortgage Insurance policies and their terms and conditions differ between insurers. We make no representation that the quotes below imply that the policies are the same in form and substance. Please review policies in detail before making any decision. Quotes in this sample were taken from LifeDirect.co.nz and do not represent the entire mortgage insurance marketplace.
The results below confirm a number of issues with mortgage insurance:
- Individual: 30 year old man, non-smoker
- Individual: 40 year old man, non-smoker
- Joint: 30 year old man and 30 year old woman, non-smoker
- Joint: 40 year old man and 40 year old woman, non-smoker
Disclaimer: Specific Mortgage Insurance policies and their terms and conditions differ between insurers. We make no representation that the quotes below imply that the policies are the same in form and substance. Please review policies in detail before making any decision. Quotes in this sample were taken from LifeDirect.co.nz and do not represent the entire mortgage insurance marketplace.
The results below confirm a number of issues with mortgage insurance:
- Females pay more than males of the same age and stats - per our conversation with an mortgage insurer, statistically speaking there's more chance of a female claiming than a male (and the same applies for income protection). This means the policies will always be more expensive.
- Smokers pay more than 15% to 25% for the same policy based on our sample quotes.
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Male, 30, non-smoker
Male and Female, 30, non-smokers
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Male, 40, non-smoker
Male and Female, 40, non-smokers
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