Mortgage insurance is an often-overlooked form of protection.
While most homeowners understand the importance of fire and home content insurance, not many realise that their mortgage can – and should – be insured.
Here’s how it works, and how to choose:
What is mortgage insurance?
Mortgage insurance covers your outstanding home loan is paid, in the event of death, or Total and Permanent Disability (TPD)*.
For HDB owners, mortgage insurance is mandatory; it comes in the form of the Home Protection Scheme (HPS).
However, you can switch to a private insurer if you choose – we will explain more about this below.
For private property owners (or those who opt to use private insurers) there are two types of mortgage insurance:
The first type is Mortgage Reducing Term Assurance (MRTA).
With MRTA, the pay-out always corresponds to your outstanding loan (e.g. if your outstanding mortgage is $500,000, then the payout would be $500,000).
As the amount of coverage decreases (because you pay off your loan over time), the premiums for MRTA will usually stay the same.
The second type of mortgage insurance is Level Term insurance.
This is more similar to a conventional insurance policy, because there is a fixed premium, and a fixed pay-out.
Don’t be surprised that Level Term insurance costs lower than MRTA, though.
Like many forms of insurance, mortgage or level term insurance can also come with optional riders.
*TPD means being permanently disabled, to the extent that you cannot engage in any occupation or business. It also covers circumstances like blindness, or loss of two limbs above the wrist or ankle; check the exact definition with the insurer you buy from.
First, how do you choose between level term and reducing term?
The first consideration is whether you already have other forms of insurance, such as a term life/whole life insurance policy.
If for some reason you’re not well insured (e.g. due to pre-existing medical conditions), then you should consider level term instead – the fixed pay-out can help to “fill the gaps” in your financial protection.
Do remember that most mortgage insurance policies only cover you to the age of 65, unlike level term insurance, which can cover you until age 99.
Talk to a financial adviser, on whether you should have it “double” as a sort of life insurance.
The second consideration is whether you’ll be buying another home.
For example, say you are just five or six years into repaying your property, when you decide to buy another house. Right afterwards, an accident happens.
Because the Level Term policy has a fixed pay-out, it may be enough to cover both your remaining mortgage, and part of the mortgage for your second property.
Second, how do you pick between HPS and a private insurer?
If you are an HDB property owner, you should note that HPS is not always the cheapest option.
It’s possible that a private insurer may charge less, but still provide the same level of protection.
As such, it’s a good idea to compare available policies; don’t assume HPS is cheapest.
Another factor to consider is flexibility.
With HPS, the outstanding mortgage on your flat is paid to HDB upon your death or disability.
With a private insurer, however, the outstanding mortgage is paid to your beneficiaries in cash.
This provides a bit more flexibility (e.g. if there is still time to pay off the mortgage, they can use the cash from your mortgage insurance to cover other bills, until your life insurance pays out).
Also, mortgage insurance policies from private insurers can be transferred when you buy your next property.
HPS, however, terminates as soon as your flat is paid for.
You might actually save money by using a private insurer, if you get the mortgage insurance while you’re younger (premiums get higher as you age).
You can then carry on at the same lower premiums, when you move on to buy another property.
Finally, how do you find the best rate?
Note that it’s possible for two policies to provide the exact same protection, but charge different prices.
This is because each insurer evaluates risk differently.
In such cases, there’s usually no advantage to having the more expensive policy.
As there can be hundreds of policies on the market at any one time, it’s probably not practical for you to call each insurer or bank to compare.
If you contact us, we can provide you with information on the best options, comparing policies from 12 reputable insurance companies in Singapore to best suit your needs.
