In Singapore, homeownership is a significant milestone. However, the journey doesn’t end with the purchase of a home. Protecting this valuable asset and ensuring financial security for your family is equally important. This is where mortgage insurance comes into play. Often overlooked, mortgage insurance is a critical safety net that provides peace of mind in the face of life’s uncertainties.

Understanding Mortgage Insurance

Mortgage insurance, also known as Mortgage Reducing Term Assurance (MRTA), is designed to protect your mortgage loan against unforeseen events such as death, terminal illness, or total and permanent disability. In such scenarios, the insurer provides a lump sum payout to settle the outstanding home loan, thereby relieving your family from the burden of mortgage payments and ensuring they retain their home.

The primary purpose of mortgage insurance is to safeguard your family’s well-being and your home’s security. Without this protection, the sudden loss of income due to a life-changing event could jeopardize your family’s ability to maintain mortgage payments, potentially leading to the loss of their home. By securing mortgage insurance, you ensure that your family’s shelter and stability are preserved, even in the worst-case scenario.

Say you do not have mortgage insurance, what happens in the event of death or permanent disability?

Scenario 1: You are the only borrower.

Your property will be foreclosed and sold by the bank. This can be prevented if your beneficiaries are able to take over the financing of the outstanding liability owed to the bank.

Scenario 2: There is a co-borrower.

Your co-borrower will be required to take on the responsibility of financing the entire outstanding loan amount.

Do take note that for both scenarios above, the individual(s) taking over the financing of the loan must pass the Total Debt Servicing Ratio (TDSR) framework. This includes having a good credit rating and sufficient income.

Case Study:

Your income: $6,000
Your spouse’s income: $6,000
Outstanding loan amount: $1,000,000
Monthly instalment example: $4,500

Assuming there are no debts and credit is clean, managing a monthly instalment of $4,500 with a combined income of $12,000 meets the TDSR requirement. (55% of $12,000 = $6,600, which is more than $4,500).

However if either you or your spouse were to pass on, the total income now will be $6,000. TDSR cannot be passed as 55% x $6,000 = $3,300 which is less than $4,500 monthly instalment.

Is it compulsory to get Mortgage Insurance?

Mortgage Insurance is optional for private properties such as landed, private condominiums and executive condominiums. 

Mortgage Insurance is compulsory for HDB.

Types of Mortgage Insurance in Singapore

Home Protection Scheme (HPS): Provided by CPF and exclusively for HDB flat owners, the HPS is a mortgage-reducing insurance that provides coverage in cases of death, terminal illness, or total permanent disability. This coverage lasts till age 65, or until your home loan has been fully paid, whichever comes earlier. It is compulsory for HDB owners using CPF funds for their housing loan repayments, you may however choose to opt out if you have an existing term life insurance policy or MRTA, that covers your outstanding home loan amount.

Mortgage Reducing Term Assurance (MRTA): Commonly referred to as private mortgage insurance, MRTA covers the outstanding mortgage loan amount, with the sum assured decreasing over time as the mortgage balance reduces. You are able to port over your current MRTA to a new property purchase, which is beneficial due to the increasing premiums as you age, and also eliminates the need for fresh underwriting if you have new health conditions.

Level Term Assurance (Term Life Insurance): Unlike MRTA, LTA offers a fixed sum assured throughout the policy term of your choice, providing versatility and broader coverage that extends beyond just the mortgage. Premiums are level throughout the policy term, and it is up to you when to start or end the coverage as the policy is tagged to you instead of the property.

Choosing Between HPS and Private Mortgage Insurance

For HDB flat owners, HPS is mandatory when using CPF funds for loan repayments. If you prefer additional coverage though, such as including critical illness coverage on top of death, terminal illness and permanent disability, you can consider replacing / supplementing your HPS with a term life insurance instead.

Choosing Between Mortgage Insurance (MRTA) and Term Life Insurance

Comparison:

MRTA covers your outstanding mortgage loan amount (which reduces over time) in the event of death, terminal illness or permanent disability.

• Option to add on additional riders, such as coverage for critical illness.
• You need a property that has an outstanding mortgage to purchase, coverage starts from loan approval.
• Premiums are cheaper as coverage reduces over time.

Term Insurance pays out the sum assured as per your policy plan in the event of death, terminal illness or permanent disability. 

• Option to add on additional riders, such as coverage for critical illness.
• You do not require a property to purchase, coverage starts immediately.
• Premiums are slightly more expensive as coverage remains level throughout the policy term. Even if the mortgage is paid in full, you will still enjoy the same amount of coverage.

When considering mortgage insurance, it’s crucial to assess factors such as the outstanding loan amount, loan tenure, age, health, and co-ownership status. These elements will influence the cost and coverage of your mortgage insurance, helping you make an informed decision that aligns with your financial needs and goals.

Ending Thoughts

In Singapore’s dynamic property market, mortgage insurance is an essential tool for homeowners seeking to protect their investment and their family’s future. Whether you opt for the Home Protection Scheme or private mortgage insurance, the key is to ensure that your coverage meets your needs and provides the security you desire. 

By staying informed and choosing the right mortgage insurance, you can navigate the complexities of homeownership with confidence and peace of mind. 

Speak with a trusted financial advisor for a more comprehensive breakdown that aligns with your financial goals.