This article is probably more for Singapore specifically. If you are located outside of Singapore and you get some sort of ideas from this article, please do your own research and due diligence in your own country.
We all know that getting a new house, especially for first-timers like newly wed couples, is an exciting milestone. However, it is a huge financial commitment, and I mean HUGE, that will go on for long. So, the one question that one should ask is if you as a couple or a solo breadwinner will be able to pay off the mortgage? Most importantly, what happens if the main provider got into an unexpected event and is not able to pay the mortgage? Wouldn’t this be a big financial burden for the rest of the family?
Yes, most people probably just figure this out afterwards. The worst case is when people don’t care about the questions above. So, what’s there to be done?
The right protection should be in place to ensure that your loved ones will always have shelter no matter what curveballs life throws. Most importantly, it is to help them sleep well at night.
What Is Mortgage Insurance And Its Importance?
In today’s climate, interest rates can be quite volatile and it can especially affect people who have signed up for a floating interest rate loan. The impact of financial burden is worse as the family members would need to somehow pay more interest especially when the main provider no longer can do so.
Events like an illness or accident can turn your mortgage into a nightmare for your loved ones easily in just a blink of an eye as the loan still has to be serviced. The responsibility is passed on to the family. With how extremely stressful this situation can cause your loved ones, this is where Mortgage Insurance comes in.
Generally, Mortgage insurance is a type of insurance that covers your outstanding housing loan amount and protects you and your family financially in the event of death, terminal illness or total and permanent disability.
However, there are generally 3 different options that people can choose from. They are:
- Home Protection Scheme (HPS)
- Mortgage Reducing Term Assurance (MRTA)
- Term Insurance
So, the question now is, which one is more suitable for you? Instead of which one is better.
Home Protection Scheme (HPS)
HPS is generally available only for HDB flat owners while private homeowners can opt for either MRTA or term insurance for their mortgage insurance.
It is mortgage-reducing insurance that provides coverage for your home loan, and covers your mortgage in the event of death, terminal illness or total permanent disability. HPS will cover you till you are 65, or until your housing loan has been fully paid up, whichever comes earlier.
Now, generally you would use your CPF funds to pay for your monthly housing loan installment. Else it would be too hefty for your pockets. However, it is precisely this that makes it compulsory for you to have HPS. Well, it is obvious.
However, you can still choose to opt out of HPS if you have an existing insurance policy, such as term life insurance or MRTA, which can cover your outstanding mortgage amount adequately.
HPS is tagged to your property. This means that if you are going to get a new property, you need to get a new HPS.
Mortgage Reducing Term Assurance (MRTA)
This one, just like its name says, is a mortgage-reducing insurance with coverage that corresponds to your outstanding mortgage amount. How this works is that the Sum Assured decreases over time as your outstanding mortgage amount decreases when you repay your loan.
MRTA is tagged to you instead of the property. So, the good part is wherever you move, you can bring the existing coverage over. However, it is precisely because of this that you actually might not have enough coverage for your new property because it uses existing coverage instead. So as your existing coverage decreases, naturally it becomes not enough for your new property.
Its coverage starts from the date of your housing loan approval. Its sum assured is limited to your mortgage loan amount.
Term Insurance
Now, before I joined my new line of work, I never thought this was possible until I joined this line of work and yes, it is possible. Even though this is typically used more for life insurance needs, it can actually be a strategy to use it to cover your housing loan.
How?
The purpose of mortgage insurance is so that your family doesn’t bear the financial burden of having to pay a huge mortgage amount when something happens to you. Usually it is in the events of death, terminal illness or total permanent disability. We all know term insurance does cover these too.
The main things though, are that term insurance not only is tied to you instead of your property, but it offers consistent coverage over a fixed duration of your choice. It is versatile in the sense that you can choose how long your coverage should be.
Unlike MRTA, you can choose to start your coverage even before you purchase your property. You also don’t have to terminate your plan even after your mortgage has been fully paid up and can continue using it as the mortgage insurance for your subsequent properties. This really makes financial sense when the coverage you need is similar.
Also, unlike MRTA, the sum assured depends on your own choice or the insurer’s allowed limits.
What About Payouts?
If something really happens, how will the payouts be?
For MRTA, due to its purpose, the payouts are usually only enough to offset your remaining mortgage payments.
For term insurance, however, you would likely have excess coverage depending on how much you have and this excess can be used for other needs beyond servicing your home loan. For example, if you purchased a million for coverage but your remaining mortgage payments are left with $500,000 then you would have the excess while MRTA will not have such a thing.
So, do consider properly which one is more suitable for you. Afterall, when it comes to supporting your loved ones financially, it’s always better to have more than less.
Conclusion
Insurance is often already a topic that people tend to shun in Singapore. On top of that, house related insurance is the one thing that people also don’t talk about, even sometimes after having their own houses. With that said, one still needs to ensure that one has the proper coverage and protection for his/her needs. Do contact professionals to know more.
With that, thank you for reading. If you think this might be helpful to other people, feel free to share. This article is written based on my own research, opinion, and experiences. If you have any comments, feel free to comment below so that we all can learn together.
Thank you for reading.
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