06 Nov Financial Literacy Always Needs Work
Even some basic understanding goes a long way in making better financial decisions and understanding how you are and aren’t financially protected.
Two surveys recently appeared that indicated varying levels of financial literacy in Australia and one related to our biggest financial commitment.
Programme for International Student Assessment’s (PISA) first financial literacy assessment showed Australian 15 year olds (or the ones surveyed) placed 4th out of 18 countries and 15.9% of the Australians achieved the highest level of financial literacy.
Now this sounds encouraging, but surveys are one thing when you’re still in school, but they’re another when you’re out in the real world making financial decisions and borrowing money.
Digital Finance Analytics (DFA) surveyed 26,000 Australian borrowers on a variety of questions and several of them related to lenders’ mortgage insurance or LMI.
Lenders’ mortgage insurance is something that protects the lender from a default by the borrower and is generally required when someone takes out a loan greater than 80% of the value of the property.
Fairly basic, but DFA’s survey showed borrowers understanding of LMI to be very poor.
Nearly 40% of existing borrowers thought LMI was there to protect them, while over 50% of first home buyers (the most likely to use LMI) also thought LMI protected them.
In total, over 80% of first home buyers either thought LMI protected them or were just unsure about what it was for – yet they were paying it because their deposits weren’t big enough to avoid it.
It would seem they assumed they had mortgage protection insurance or some form of illness or injury insurance.
This is a concern if a borrower suffers injury, illness or job loss and they assume lenders’ mortgage insurance is covering their payments.
At the moment there’s around one million LMI policies in Australia, hopefully the other 974,000 are better informed.