When most people say they’ve planned for the “worst case scenario” for their home loan, they usually mean a higher interest rate.
They seldom mean they’ve thought through deeper complications – such as being unable to work, or dying, while they still have a home loan. Here’s what would happen in such a scenario…
How much money would the home loan cost the average family?
As an example, consider the typical suburban condominium.
The cost of such a property is around $1.4 million. The full loan amount is $1.05 million (a Loan to Value ratio of 75 per cent). At an interest rate of 2% per annum, over 30 years, the monthly loan repayment is about $3,881 per month.
Should the borrower pass away 15 years into the loan, the outstanding amount is at least $698,500 (it may be more, depending on how the bank calculates the remaining interest).
The borrower’s family members are typically required to pay off this outstanding loan in CASH when the single borrower passes away.
What if there are joint-borrowers?
Many home buyers are joint-borrowers, such as with their spouse, or in-law. Should one borrower pass away in such a scenario, the other will have to shoulder the full burden of the loan. However, it’s not as simple as just being willing to do so.
In Singapore, borrowers are subject to a restriction known as the Total Debt Servicing Ratio (TDSR). Under the TDSR, your monthly home loan – inclusive of all other debts, such as car loans or personal loans – cannot exceed 60% of your monthly assessable income.
For example, if you have a monthly assessable income of $5,000, your TDSR limit is $3,000.
Note that in the case of the private condominium above, the monthly home loan repayment is $3,881 per month. This would exceed your TDSR ratio, so you would not be able to carry on with the same loan.
If the surviving borrower cannot carry on with the loan, they may have to…
- fork out a lump sum to reduce the loan amount, to the point where monthly repayments fall within the TDSR limits, or
- go through a complex refinancing process, which will also incur further legal fees.
It’s especially problematic when a surviving borrower has a much smaller income.
For example, consider if the deceased had an income of $10,000 per month, while the surviving co-borrower has an income of just $2,500 per month; no number of refinancing options would help.
There are further emotional and financial costs
Other common forms of fallout include:
- Incurring high-interest debt, as the family turns to various forms of unsecured lending (e.g. personal loans, credit cards, or even worse, unlicensed moneylenders) to cope with the mortgage
- Being forced to “fire sale” the house, before a foreclosure can happen. This often results in being forced to sell at cost, or even at a loss
- A burden on young adult children, who may be forced to step in and help pay the mortgage despite their entry-level wages (this can result in them later lacking savings for their own home)
Mortgage insurance can mitigate the fallout in such situations
Mortgage insurance is a form of insurance that pays off your outstanding home loan, in the event of the borrower’s death or Total Permanent Disability (TPD).
For single borrowers, MRTA is vital in preventing the loss of the home.
If the home loan is taken by joint borrowers however, they have two different options:
1. Buy joint mortgage insurance.
This means the outstanding home loan will be paid off if either of the insured parties passes on.
2. Have each borrower buy a separate mortgage insurance policy.
The cost is only slightly higher than joint mortgage insurance; but twice the coverage is provided (e.g. if both borrowers pass on, the outstanding home loan is covered twice over; a significant boon to their beneficiaries).
As there isn’t much of a price difference, most homeowners are better off getting separate mortgage insurance policies.
Don’t waste years of loan repayment, for the sake of saving on mortgage insurance.
Most Singaporeans have loan tenures that stretch from 25 to 30 years. Much of your life will be given over to servicing the mortgage.
Don’t throw away all that work and sacrifice, for the sake of saving on mortgage insurance.
It makes no financial sense to risk a million-dollar property asset, for the sake of saving a few thousand dollars.
You can apply for a mortgage insurance policy in minutes by contacting us today.
