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Lifestyle Series: Nothing to sneeze at – when illness or injury strike

Our health and wellbeing plays a vital role in managing a home loan – Mortgage Choice broker Fairien Azeem explains the options available when illness or injury strike.

By Fairien Azeem, Mortgage Choice in Horningsea Park

Our health and wellbeing plays a vital role in managing a home loan –Mortgage Choice broker Fairien Azeem explains the options available when illness or injury strike.

Try this quick quiz. What is one of the main causes of homes being repossessed in Australia?

If you answered higher interest rates, think again.  Research by RMIT on behalf of the Australian Housing and Urban Research Institute[1] found that one in five people who have had their homes repossessed were victims of illness or injury.

It's a scary thought. Our ability to maintain mortgage repayments hinges on earning a regular income, and even the most talented or productive worker can struggle with their loan if they are forced out of the workforce – even temporarily, for health reasons.

On one hand it's a good incentive to keep up that exercise regime. But it is also a reminder of the importance of income protection insurance.

Protect your income

As a mortgage broker, it often surprises me how many home owners protect their property with building and contents insurance while overlooking what is arguably their most valuable asset – their ability to earn a regular wage or salary.

Sure, if you have an accident at work you may be covered by workers compensation insurance. But if you experience serious injury simply by kicking a ball around the yard with the kids, or climbing a ladder to clean out the gutters, you could be left financially skewered. That's why it makes sense to consider income protection insurance.

This type of cover typically pays around 75% of your normal wage or salary if poor health or injury leaves you unable to work. There is a wide range of policy options to select from, and you can opt to receive payments for just a few years or until you reach age 65. It boils down to the type of policy you pay for.

Options to manage the cost

The cost of income protection insurance varies widely though premiums are normally tax deductible, which reduces the expense. Alternatively you may be able to purchase income insurance through your super fund, which can be cheaper than arranging cover independently.

Clever ways to use savings

It is critical to have a pool of savings that could tide you over a period of illness or injury. Spare cash can be held in a high interest savings account, but when you have a mortgage, it makes more sense to put the money to work reducing your loan. A way to do this is to channel your savings into your home loan to reduce the interest charged, helping you pay off the mortgage sooner. The availability of redraw facilities on most loans means you can access your savings in an emergency.

Alternatively you could consider an offset account, where the balance of your savings is held in a linked account that is deducted from (or offset against) the balance of your mortgage when monthly interest charges are calculated.

Tap into loan features

There are other strategies to help manage your mortgage if you're struck by illness or injury. Switching to interest only payments will lower your loan repayments temporarily until you get back on your feet. Some lenders allow repayment holidays though you will need to be ahead with your loan repayments to take advantage of this feature.

The main thing is to get in touch with your broker or lender and talk through the range of options that could apply in your particular circumstances.  Hopefully you will never experience the trauma of illness or injury but it can, and does, happen and it pays to be prepared.  

Useful resources

[1] Mortgage default in Australia: nature, causes and social and economic impacts.

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