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At it’s most basic, mortgage insurance simply refers to an insurance policy which would fully repay the outstanding balance of a home loan should the borrower dies or becomes incapable of generating an income.
Also known as mortgage term reducing assurance (MRTA), it is something that a lender would often recommend borrowers to purchase. So much so that banks often offer a discounted interest rate on their mortgages should a borrower sign up for one.
From the perspective of a borrower, mortgage insurance helps provide a peace of mind that the home would not be lost through foreclosure should something bad happens to him or her.
From the lender’s perspective, it is a method of protecting their investment as such a policy pretty much guarantees that they would get their money back… unless the borrower chooses to default for one reason or another.
If the choice of signing up for mortgage insurance is a choice that is open to you, and you are sitting on the fence for this one, then the main benefits that might convince you to buy it (which don’t need any explanation) is that it removes the financial burden which family member would have to shoulder should you, as the main breadwinner, no longer be able to produce a personal income.
Either your family members suffer from the financial burden, or they suffer even more for having no roof under their heads.
Mortgage insurance premiums
As with all insurance policies, people curse at the premiums whenever the due dates arrive. But they would turn around and thank the heavens should a situation arise where they can make claims towards it.
Insurance policies are more often than not, a hard sell. But the benefits that comes with this type of insurance are very persuasive.
After all mortgage insurance premiums are pretty affordable when you compare that to the size of a home loan.
Being a type of decreasing term insurance, as the outstanding loan balance reduces over time due to consistent monthly payments towards the mortgage, premiums reduce as well as the sum insured decreases as well.
This is because unlike a level term insurance where a lump sum amount of money is paid to a claimant, mortgage insurance only pays enough to cover the outstanding debt owed to a lender.
And as the loan balance goes down, so does the coverage, and the premium follows suit.
At this point, it must be said that there are two main categories of mortgage insurance in the Singapore property market.
- Home protection scheme (HPS) from CPF
- Private mortgage insurance
HPS is automatically signed up for HDB flat owners who use their CPF monies to pay the home loan.
The exception is when the home owner has alternative insurance plans like:
- Term life insurance
- Whole life insurance
- Endowment plans
- Life riders stacked on basic policies
- Decreasing term insurance or riders
- Private mortgage insurance
The government knows that there is no point giving your coverage when you have already got yourself covered.
Good for you!
HDB owners who are using cash instead of CPF to pay for their mortgages would not have HPS automatically signed up. But they can still opt to join the program voluntarily.
All other types of property ownership or loan arrangements would have to go for the alternative which is private mortgage insurance (PMI).
This basically refers to mortgage insurance that is offered by all private insurers and underwriters.
Calculations for determining mortgage insurance premiums take into account various factors including:
- Original loan amount or loan balance
- loan Interest rates
- Loan tenure
- Credit score
- Property value
- Age of applicant
- Health condition and status
- Personal lifestyle
It is no wonder insurance agents are seldom able to calculate a premium on the spot when a borrower asks about it.
There are special private mortgage insurance calculators that can be used. But they can only provide an estimate cost instead of a concrete quote.
So you would never be able buy mortgage insurance as easily as something like travel insurance.
Special features of mortgage insurance
PMI has some unique features that can be advantageous to some homeowners.
PMI vs HPS
Because HPS insures owners individually, co-owners would have to purchase their own HPS policies.
In addition to that, when one party dies or suffers total permanent disability for example, the lump sum payment for the claim would be deposited directly into the CPF account.
Private mortgage insurance on the other hand, can be arranged for a lump sum cash payment to the remaining owner. It would then be up to him or her to decide whether to use the money to pay down the loan or use them for more immediate pressing issues.
On top of that, PMI offer joint policies.
This means that should one party dies, the other co-owner would automatically receive the claim as a beneficiary.
This is one huge material difference between HPS and PMI.
Don’t forget to inform your insurance agent about the ownership structure of the property.
Joint tenancy is not the same as tenants-in-common, and therefore would require different contracts.
As the world of private insurance can seem like the wild west to some people as it is up to the creativity of insurers to conceptualize attractive policies, there is a wealth of riders and add-ons that a policy holder can purchase to get more coverage protetion.
These can include riders for:
- Critical illness
- Medical coverage
- Personal accident
There are even instances where people can get their insurance premiums waived through reward programs!
If you are eligible for private mortgage insurance and knows zilch about them, exploring them can open your eyes to a fantasy world in which you never knew existed.
As if assessing your performance like a KPI, some insurance companies actually offer mortgage insurance policies that offer the insured refunds and discounts should they have been “obedient” and have not made any claims from the plans during the policy term.
Many PMI policies do allow the transfer of the policy to another property.
This allows the insured to retain the low premiums of an existing policy.
This is like retaining your NCD on the car insurance!
Should you buy PMI?
This is really a question which you need to ask yourself.
Your personal decision criteria should include questions like:
- Can your spouse or children repay the home loan by themselves? And if so, do you want them to?
- Does your family members have a backup place to live in should you lose the house?
- Can co-borrowers and co-owners take on the financial burden and make ends meet?
- Do you think that such policies add value to your peace of mind?
- Do you think that you would easily outlive the life of the policy?
It must be said that mortgage insurance premiums are not exactly cheap.
They also don’t insure you for as long as you live and usually terminates at either the age 65 or 75.
This implies that if you reach that milestone age, all the premiums spent on mortgage insurance would be worth nothing except the years of peace of mind.
Also consider that because of MAS cooling measures, most people wouldn’t borrow a loan pass the age of 65.
These types of policy plans also don’t pay out due to job losses.
So if you feel that you would easily live to the age of the expected life expectancy of Singapore residents (82 years), then maybe your can give mortgage insurance a pass.
Otherwise, for an affordable annual premium in exchange for peace of mind over the years, it can truly be worth the extra expense.
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