Singapore is one of the most expensive countries for housing and your home is probably the most expensive asset you own. It’s no surprising that most Singaporeans spend most of their life repaying the home loan. Because of the loan, the said asset can also be the biggest liability too. What happens if the homeowner in no longer able to pay for the mortgage loan due to an unfortunate event? This is exactly the situation when mortgage insurance comes in handy, as well as protect your loved ones.
What is mortgage insurance?
If you are a homeowner, mortgage insurance protects your family from losing the home in the event of your death or disability. Without mortgage insurance, in the unfortunate event of a homeowner’s death with outstanding mortgage loans, the loans will become a financial burden to the surviving family members. If the family members are not able to continue repaying the loan, the house will be seized back by a bank and they will become homeless.
In Singapore, mortgage insurance is commonly known as Mortgage Reduced Term Assurance (MRTA). As the mortgage loan gets paid off every month, the sum assured is reduced gradually.
Why buy mortgage insurance?
There are several reasons why mortgage insurance is highly recommended for homeowners:
1. Protect your loved ones
If you have an outstanding mortgage loan, the lender can seize your property in an unfortunate circumstance that you default loan repayment. If you were to pass on, become permanently disabled or critically ill, and default the loan repayment, your family would no longer have a place to call ‘home’.
In such situations, mortgage insurance will help your family to repay the mortgage loan and, keep your home intact.
2. Protect your mortgage under co-ownership
If you co-own a property with another person and aren’t fully responsible for the home loan repayments, you should consider buying mortgage insurance. In the event that one party passes on or is not able to work anymore, the other party will not lose the property.
Joint tenants – Joint tenants are those who both own a property 100% together (normally between spouses). Mortgage insurance is compulsory in this case unless your co-owner can continue repayments if you pass on or can no longer work.
3. Mortgage insurance is transferable
As Home Protection Scheme (HPS) is tied to a property, once you upgrade or shift house, your current HPS cannot be transferred to the new house. At this point of time, if you purchase another insurance, the insurance cost will increase as you age and, your health conditions will be reassessed which may impact your chances of being insured again.
If you have your own mortgage insurance, you are not tied to any property and hence, it can be transferred from one property to another
4. Mortgage insurance may offer more benefits over Home Protection Scheme (HPS)
Although Home Protection Scheme (HPS) is compulsory for HDB buyers using CPF to repay their mortgage loans, you can opt out from it if you find a better mortgage insurance policy.
HPS is offered by the government but it is not necessarily cheaper and, private mortgage policies can offer some advantages over HPS in some cases.
When you purchase a flat together with your spouse, HPS will be issued to both you and your spouse, and each of you will have to pay HPS premiums individually. If you sign up for a HPS joint policy which covers both you and your partner, not only it will be cheaper but you may also be able to get discounts when you sign up as a couple.
5. Flexible enough to cover for different needs
Mortgage insurance from banks and the Home Protection Scheme (HPS) normally only cover the bare minimum such as death, terminal illness and total permanent disability.
If you were unfortunate enough to be hit with a critical illness, these insurance policies will not cover you. However, if you buy a private mortgage insurance policy, you will have an option to include critical illness in your coverage. In addition, you will have the flexibility on the length of coverage, and the ability to include other liabilities or properties.
6. Prevent the risk of properties being illiquid
In the event that the owner of a property unfortunately passes on and the surviving family members have financial issues to settle outstanding loans, the property cannot be easily sold off to settle the financial problems as it would take time to conduct advertising, viewings etc.
With mortgage insurance, so long as all relevant documents are provided, payouts normally take a few weeks or less. This eliminates the hassles of selling the house to settle the financial problems.
Factors that determine mortgage insurance premiums
Mortgage insurance premiums are determined based on a case-by-case basis using the insurer’s underwriting process, and there are a few factors that will impact the mortgage insurance premium.
1. Outstanding loan amount
The lower the loan amount of your mortgage is, the lesser risks there are. Therefore, your premiums are likely to be lower in this case.
2. Loan tenure
The longer the tenure of your loan is, the more expensive the premiums are as you have a higher chance of being unable to pay off the loan before you pass on or become disabled.
3. Your age
Just like any other insurance premiums, the older you are, the more costly the mortgage premiums are, since you are more likely to be hit by health issues as you age. Some insurers may impose an age limit of about 60.
4. Your health
Your insurer may ask you to declare your pre-existing health conditions (if any) before you sign your mortgage insurance policy as the older you are, it is more likely that you may have more health issues. Serious health issues may exclude you from mortgage insurance altogether or make your premiums higher.
5. Your credit score
If your credit score is poor, it shows that you are a risky borrower, and it may affect your mortgage premiums.
6. Your income
The higher the income in relation to your mortgage loan amount, the lower the mortgage premiums as you are considered as a less risky borrower.
7. Your co-borrower
If you co-own your property with someone else, they will also be assessed based on the above-mentioned factors, which may have affect your premiums.