With the recent property boom in Singapore, there’s an increment in people taking up Private Bank Loan and thus creating a concern in terms of financial planning – a need to protect the mortgage loan (and their pricey assets) should anything unforeseen happen to the Loan Owners…
The Common Belief – Should Anything Happen, I Can Just Sell Off The Property…
If everything is so straight forward, life will be perfect! In Reality, Property does not sell by itself especially if the Developer had done quite a heavy bit of their own advertising. The initial selling price is usually jacked up and to really pull it off in selling – takes patience, time, effort, negotiation and being able to sustain the few months of loan payment.
Or even the worst case of selling the property below the market value…
So What Should You Do? For Any Mortgage Loan, There’s Mortgage Insurance!
If you only know Term Insurance, there’s in fact a Mortgage Insurance or commonly known as Mortgage Reducing Term Insurance and not to be confused with Decreasing Term Insurance.
In general, Mortgage Insurance works in manner of:
- Basic Coverage against Death and Total and Permanent Disability (TPD)
- For Death, the payout is usually in terms of Lump Sum
- For TPD, the payout will vary amongst Insurance Companies – Partial Lump Sum or Percentage Payout
- For Concern against Critical Illness, the coverage can be added in the form of a Rider. And the Rider can be used to provide lump sum payout against any Critical Illness or to waive off future Premiums for the Main Plan
- There’s usually no Cash Value for this plan
And in terms of the Sum Assured:
- The Sum Assured reduces with each year in accordance to the Interest Rate. This interest rate is usually set higher than the mortgage loan interest rate (accordance to the inital fixed and future Sibor). The reduction of Sum Assured will mimic your actual and regular loan repayments
- The interest rate is usually set higher because with a higher interest rate set, the run-down rate is slower than your actual loan reduction and that also means that should anything happens, the payout is more than your actual loan.
In terms Of The Premiums:
- Premium is the lowest for Mortgage Reducing Term Insurance in comparison to Whole Life, Endowment, Level Term and even Decreasing Term Insurance
- You also get to service limited Premium Term for the Mortgage Reducing Term Insurance and also vary amongst Insurance Companies, some offer 75% or 2-4 year less of the Coverage Term
- The Premium is level throughout and not slowly decreasing because nobody will want to pay so much upfront and should anything happen – have paid so much upfront and will not be value for money!
What Else To Note For Your Mortgage Insurance…
- Mortgage Insurance is portable among Mortgage Loans. This means that should you clear off one loan and decide to take up a new loan, your existing Mortgage Insurance can be used to cover the new Loan. Any shortfall can be covered up with a new Mortgage Insurance. You will get to save premiums in the long run as compared to terminating an existing to get a total new one.
- You can request to reduce your current Sum Assured after a significant Capital Repayment to see if you can save on the future premiums. Do note that the new premium for the Reduced Sum Assured may be based on your onset age. Please kindly check with your Financial Planner on better clarification.
- After clearing your Loan, can you still keep your Mortgage Insurance. Answer is Yes! Mortgage Insurance is still a Life Insurance after all therefore you can still keep the Plan after the Loan. Only requirement is that when you apply for the Insurance, you must produce your Legal Loan Document to prove that a loan is in existence and not because you are buying this insurance to save on the premiums.
What To Expect For Part 2 and Part 3?
This first post is all about what to expect in a Mortgage Insurance and in Part 2, you and I will be looking into the Underwriting Requirements for a Mortgage Insurance and in Part 3, we’ll be looking into why should you really choose Mortgage Insurance and not a Level or Decreasing Term to protect your Mortgage Loan…
Meanwhile, if you are one of the many Singaporeans who have gotten your Private Property, congratulations and do remember it’s a Prized Possession and do get a Mortgage Insurance to protect your loan and your family.