There’s a similarity between homeownership and good health: both tend to work so smoothly, we don’t take the trouble to understand them until something goes wrong.
This is unfortunate since when terminal illness strikes, we should be able to spend our remaining time with our loved ones – not worrying about whether they’ll have a roof over their heads.
Here’s what to understand, and how to prepare:
Understand how your mortgage is being paid
In Singapore, most people pay for their home loan through their CPF Ordinary Account (CPF OA) funds.
This can be true for both HDB loans and private bank loans.
Because the process is automatic, many of us don’t understand how the monthly costs work.
For a typical condo (1,400 square feet), which costs $1.5 million, the maximum loan is $1.125 million (bank loans finance up to 75% of your private property).
At 2% interest over 25 years, this is roughly $4,760+ per month.
Can your co-borrower afford this without you?
Most Singaporeans can manage their home loans with the help of a co-borrower/co-owner, most often a spouse.
However, do look at the typical numbers above, and consider whether it would be affordable to one person alone.
Even if your co-borrower is willing to pay that amount, there are restrictions on whether they’ll be allowed to.
For private properties, the bank loan is restricted to 60% of the borrower’s monthly income (Total Debt Servicing Ratio).
In addition, banks use a theoretical interest rate of 3.5% for the purposes of this calculation in the event you’re diagnosed with a terminal illness or pass away.
In the above example, the monthly repayment would be treated as being around $5,630 per month.
This would require a monthly income of at least $9,380+, for a single borrower to qualify.
If your co-borrower cannot qualify to take a mortgage after you’re gone, there’s no choice but to sell the house.
As such, it’s important to know the real numbers, rather than just assuming your CPF will continue “handling” things.
Do speak to your bank, to find out how much you’re actually paying.
“Right-sizing” early by moving to a smaller home
Once you’ve passed on, the bank will likely demand immediate payment of the outstanding mortgage.
The exception to this is if your co-borrower qualifies to take on the entirety of the mortgage (see above), in which case arrangements can be made to transfer the loan to them.
This means that, if you know your remaining time is limited, you may have to start the process of right-sizing early.
This means looking for a lower-cost home, which can be funded through the sale of your current one.
This could mean moving to a smaller home in the here and now.
Remember that property takes time to sell – it takes weeks to months for your property agent to conduct viewings, market the property, etc.
The quicker your loved ones are forced to sell, the greater the potential for financial loss.
Insurance payouts might offset your outstanding mortgage
An immediate priority, upon being diagnosed, is to contact your Financial Advisor.
You’ll need to determine whether payouts will suffice to cover the mortgage, and when they’ll begin.
If you intend to stop working right away, for instance, you need to work out whether Critical Illness payouts can comfortably provide for you, while still paying the mortgage.
If the sum assured from your life insurance won’t cover the outstanding mortgage, then consider partially paying down the loan.
For example, say you have $1 million outstanding, and a sum assured of $500,000.
Perhaps when the time comes, paying $300,000 into the outstanding loan could lower monthly repayments sufficiently (i.e. enough for your co-borrower to take over the whole mortgage).
This would still leave $200,000 to cover other major costs.
Note that some banks impose a fee for this sort of partial repayments, such as 1.5% of the undisbursed loan amount.
This tends to apply only in the first three years of a home loan; but do check to be sure.
Or depend on a good mortgage insurance policy
A mortgage insurance policy, such as a Mortgage Reducing Term Assurance (MRTA) or Level Term Insurance plan, will pay off your outstanding mortgage in unexpected situations such as Critical Illnesses or Total Permanent Disability (TPD).
This way, your family won’t have to take a large chunk out of any life insurance policies to pay for the house.
You’ll also be able to spend your remaining time with them in peace, knowing that they’ll be provided for.
Contact us for more information, in keeping your home secured for your family.
Our wealth planning specialists will compare policies from 12 reputable insurance companies to find the most suitable coverage for your unique needs.
