Risk: What Is It and How Does It Affect Your Home Buying Dream?
If you’re thinking about buying your first home, you might have heard the word ‘risk’ pop up a few times throughout the process.
But has anyone stopped and explained what risk might really mean in your specific situation?
When you’re buying your first home and someone mentions ‘risk’, how does it affect you? What does it mean for you? And how does it affect you buying your home?
Risk comes in lots of different forms, especially with the home buying process. When you borrow money from a bank, you face the risk that you might not be able to keep up with your payments. What happens if you suddenly lose your job? How will you make your repayments then?
If something untoward happens to you in the future, you are at risk of defaulting on your loan. That’s a potential risk that banks look at when deciding whether to lend you money.
When the banks assess you, they consider your risk to them as a borrower. After all, your ability to pay back your loan – or not – poses a risk to them.
Then there’s the potential risk of where you choose to buy your home and who you buy it from.
Phew. It’s a lot to think about, isn’t it? Yet, there is one other risk factor that the majority of people never think about.
For the purpose of this article, let’s talk about risk insurance.
Yes I know, it doesn’t sound very attractive. But to put it into perspective less than 10% of Australian’s have insurance to cover their risk of losing their income!
This type of coverage is known as income insurance. When you think about it, it’s crazy. If you buy a car, would you insure it? Of course you would. If you’re in an accident, you want to be sure it’s protected and either repaired or replaced.
If you buy a house you’d insure it, because it’s your most valuable asset.
But when you really think about it, YOU are your most valuable asset. Multiply your annual income by 10. That’s how much you will earn over ten years.
For example, if you earn $50,000 a year now, over the course of 10 years you’d earn $500,000. So if you were to be involved in an accident and your income was affected, how would you cover your bills or other expenses?
By comparison, if you had income insurance coverage your income would be covered while you were off work recovering. Your bills would be paid and your mortgage payments would be covered until you can return to work.
Now let’s consider what would happen if you didn’t have any type of insurance that covered your income if you were injured or unable to work.
Most people automatically assume they’ll simply apply with Centrelink for a sickness benefit if they were unable to work.
What happens to your mortgage payments and all your other bills if you don’t qualify for Centrelink? If you can’t find a way to get some income into the household, it could mean the difference between keeping your house and losing it.
If your financial situation gets stressful enough, statistics show that you are also at risk of losing your relationship.
Now imagine if you were unable to return to work for 20 years or 30 years? It could be well worth covering the risk.
Lots of people overlook the importance insurance can play in their lives, simply because they’ve never really considered the risks they could potentially face.
Can you imagine if your family relied on you to provide income and you were suddenly unable to earn money? What would happen to your family? What would happen to your home?
Before you rush out and buy insurance to cover your risks, think about your own personal situation. Everyone’s situation will be different. A single person in their early 20’s may not require much cover at all, but a person in their 40’s with a partner and children however may want their family to be protected in the event of an accident or injury occurring.
It’s also possible to protect ourselves against the risk of total permanent disability and trauma. These policies may be an extra cost but if you are worried about illness costs or unable to cover medical expenses this type of risk insurance can assist you financially.
Discussing horrible events that could disrupt your entire life is never a glamorous topic, but it’s vital to things in your life. Think about what might happen to your family or your assets if you weren’t prepared.
If you want to learn more about protecting your risk, take the time to speak to a financial planner and receive good independent advice on how to protect your future and your family’s well-being.