Find out how much you spend and how it compares to other Australians.
A mortgage is a home loan taken out on the property you’re buying. It can be a great way to pay for a home, but it also means that if you can’t keep up with the mortgage repayments you run the risk of losing it. Even in lean times, households still need to keep up mortgage repayments which can lead to you spending a significant proportion of your income on it.
What's the average proportion of income spent?
The average proportion of household income spent on mortgage repayments varies depending largely on housing prices in different areas. More expensive areas might be more valuable investments, but can also make it a lot harder to pay off the mortgage.
|City||Percentage of income spent on mortgage|
Source: Domain 2016
Why do Australians default on their mortgage repayments?
Australians give two main reasons for defaulting on their mortgage payments.
- Loss of employment. This is one of the main reasons people default on their mortgage. Whenever there’s a periodic economic downturn, a lot of people will have difficulty meeting their mortgage repayments. Not only is it harder to find a job, it’s a lot harder to find a job that pays as well as the previous one and is enough to keep the mortgage out of arrears.
- Injury, illness or disability. This is the other main cause of mortgage defaults in Australia. It includes conditions like depression, and needing to care for disabled family members. Adapting to these situations can be expensive, while managing them can be an ongoing time investment that interferes with one’s ability to hold a well-paying job.
Countless Australians will be impacted by these situations every single day, and the ones who have mortgages stand to lose the most. It’s worth thinking about what you’ll do if tomorrow turns out to be your day.
How to protect your mortgage from unemployment and accident
If you lose your mortgage, you’re losing time, money and your home. Simply hoping it won’t happen to you is one of the most popular strategies, but also one of the least effective.
Life insurance options that can help
If you have a life insurance policy you can receive benefits in a wide range of circumstances. Some of the circumstances in which a combined life insurance policy can pay out include:
Circumstances that life insurance can cover
- Stop work due to injury or illness. Many people specifically consider their mortgage when deciding on what type of income protection cover they want with their life or mortgage protection insurance. This is because it only pays out if you’ve been unable to work for a certain amount of time. If you have a mortgage you can select a waiting period to ensure that income protection benefits kick in before your mortgage goes into default.
- Death. You might choose a term life policy that lets your family pay off the entire mortgage at once if you pass away, to give them a high level of protection. Or, you might agree that your partner has good earning capabilities and select a policy that’s more cost-effectively focused on providing a buffer for them to transition to a life without you.
- Critical injury or illness. You can choose options that pay out a lump sum if you suffer a critical illness or injury. Often, the medical costs associated with these events are enough to send a mortgage into arrears. Building mortgage expenses into your critical injury or illness benefits can help you handle these life-changing events. For example, you might get a $500,000 lump sum payout in the event of a cancer diagnosis, and can choose to spend this repaying the mortgage so you can focus on recovery, and so that the house is paid off in the event that you don’t recover.
- Disability. You have a lot of control over the benefits claimable in the event of permanent disability. Choosing a life insurance policy that covers your partner and children, as well as yourself, in the event of disablement means that even if you have to drop shifts or work shorter hours to take care of them you can still claim benefits to help out with the cost of the mortgage.
Mortgage protection insurance
This is a direct solution. Mortgage protection insurance policies specifically protect your mortgage repayments.They are lean insurance policies focused on helping make sure you don’t default on your mortgage in adverse circumstances. Whether you’re at risk of defaulting because you lost your job, or fell seriously ill and can’t work to meet repayments, this type of policy has you covered. If you are unable to make your monthly repayment, it can pay it for you.
- You can protect your mortgage with either mortgage protection insurance, life insurance or income protection.
- If you choose life insurance, it may be possible to find policies that include mortgage protection insurance as an optional extra.
How to protect the mortgage when money’s tight
Here are some key tips to follow:
- Cut costs, but don’t ditch the life or income protection insurance. These are not luxury items, but are instead even more critical. Insurance is there to cover the costs you can’t, and should not be cancelled if you don’t have savings in the event of a serious health issue.
- Manage your policies closely. You may be able to save money by getting inexpensive basic life insurance through superannuation, and then taking out a mortgage protection insurance policy to accompany it and specifically cover the mortgage.
- Consider using an adviser, but remember to ask about fees up-front to avoid unwanted expenses. It is possible to find 100% free insurance brokers who can help you navigate these complex issues. They don’t charge you anything, but instead get paid commissions by insurers for matching customers with the right products.
- Examine the benefits associated with mortgage protection insurance policies versus customised life insurance policies before deciding on a plan of action. Consider what you do and do not need, and whether you already have any kind of cover through superannuation or your employer. Find a plan that covers all your must-haves, and none of your already-haves and don’t-wants.
In 2008, it was estimated that 783,0001 Australian households were experiencing mortgage stress, with 318,000 of them being in severe financial straits. House prices have consistently gone up since then which means the cost of mortgage payments has increased, but you also have more value in your home – so it’s even more important to make sure you can hold on to it.
If you’re having difficulty keeping up with mortgage payments, that might mean it’s more important than ever that you continue to do so.
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1. Mortgage default in Australia: nature, causes and social and economic impacts