If you’re renting out your property for the first time, your mind is probably on issues such as rental rates, security deposits, and the wording of the Tenancy Agreement (TA).
However, it’s important not to forget mortgage insurance, or home content insurance. Here’s why:
What happens if a landlord doesn’t have mortgage insurance?
Mortgage insurance pays off your outstanding property loan, in the event that you pass away, or suffer Total Permanent Disability (TPD).
This is important because, if you pass away, the bank will often demand immediate full repayment of your mortgage.
If you don’t have mortgage insurance, it will be down to your family or other loved ones to handle this.
Such an event is traumatic enough on its own; but it can be even more complicated if you’re renting out the property.
Consider the problems with selling the property
If there’s truly no way to pay the outstanding mortgage, your family’s best option is to sell the property before any foreclosure.
But they could struggle with this when there’s a tenant with an existing lease.
Your loved ones will have to check with a lawyer, to determine if the lease terms extend to them when they take ownership of the property.
Even if they can get the tenant out, it could involve legal proceedings that cost time and money.
In fact, depending on how circumstances play out, they may even need to compensate the tenant for the abrupt breaking of the lease.
The loan might become a problem too
Second, note that one can only borrow up to 45% of a property’s price or valuation (whichever is lower) if there is an outstanding home loan.
So if your loved one is still paying the mortgage on the family home, they are unlikely to also qualify to take on the rental property’s loan.
The cash portion for even a small $800,000 shoebox unit, for instance, would be a staggering $440,000.
The loan cannot be continued after your passing even if there is a rental income to pay for the instalments.
As such, mortgage insurance is extremely important for a landlord; it can prevent your legacy from turning into a liability.
What sort of mortgage insurance should a landlord have?
Landlords can opt for either Mortgage Reducing Term Assurance (MRTA), or level term insurance.
MRTA only covers the outstanding mortgage, yet premiums stay fixed throughout the policy term.
Level term insurance, however, has a fixed pay-out and fixed premiums.
Landlords who plan to buy subsequent properties (or already own multiple properties or upgrade) should consider level term insurance instead.
This is because any fixed payout can still cover part of the next property you buy.
If you use reducing term, the payout only covers the outstanding mortgage on the current property.
Also, the fixed payouts can offset the costs of potential rental vacancies, not just the mortgage payments (in case the tenant doesn’t renew the lease with their new landlords).
It’s important for landlords to have home content insurance too
It is a common misconception that tenants “pay for everything” when it comes to home maintenance.
If you read the Tenancy Agreement carefully however, this is rarely the case.
Most TAs state that your tenant is only liable for a small initial amount, such as the first $150.
The rest of the cost is typically borne by you. So if a major pipe corrodes and bursts, and costs $600 (e.g. emergency weekend visit by the plumber), you’re liable for the remaining $450.
You can’t take this out of the tenant’s security deposit either, as they weren’t responsible (fair wear and tear).
Home content insurance can cover costs like these, as and when they occur.
In addition, landlords need home content insurance with third party liability, including for tenanted properties.
If a leak or fire spreads from your home to a neighbour’s, you are liable to pay for their damages. If your tenant starts a fire that burns down your neighbour’s living room, even taking their entire security deposit won’t cover the costs!
This final consideration is appealing to tenants: it’s possible to find home content insurance that also covers the cost of tenants’ belongings – such as jewellery, laptops, or phones – to a certain amount (usually up to $500).
If your tenant learns this sort of coverage is included, it can make your unit more attractive than a competing option.
Property is a capital-intensive investment
Investing in a property is more capital intensive than investing in stocks or bonds; for many, a second property probably represents the bulk (if not all) of their investment portfolio.
Spending about a few hundred dollars a year, to protect such a major investment, is well worth the cost.
Do contact us for help, on getting the right insurance for your home and mortgage loan.
Our wealth planning specialists will compare policies from 12 reputable insurance companies to find the most suitable coverage for your unique needs.
