What are Mortgage Term?
A Thorough Comparison & Analysis
The most expensive thing you’ve ever bought is probably your house. And you could spend a substantial portion of your life repaying your home loan. Lots of things can happen in the years or even decades before your home loan is paid off.
Another way to safeguard against the uncertainty is mortgage insurance, which in case you are unable to pay off your loan due to dismay, there will be a lump sum payout.
But what is it exactly, and for whom is it? We’re going to find out.
Table of Contents
What exactly is a Mortgage Term?
Mortgage insurance is also known as Mortgage Reducing Term Assurance (MRTA) or Decreasing Term Plan, is a type of insurance designed to protect your mortgage loan from life-changing events in your life.
In the event of an accident or death, you or your family can make a claim to the insurer and get them to pay off your home loan. If you are unable to repay the ongoing loan payments, the bank can repossess the house and sell it off to recover the outstanding loan.
A notable thing is that there is no cash value in mortgage insurance, but this is substantially offset by a much higher payout resulting in greater peace of mind.
Mortgage Term VS Home Insurance
While you may have the same interpretation for both mortgage and home insurance, they do have differences in the coverages.
Mortgage Term Plan provides a lump sum to offset your outstanding housing loan. It provides financial protection to a mortgage lender against the risk that a borrower will default on the mortgage.
It is crucial to have mortgage insurance and to keep a roof over your family’s heads in the event of any of life’s uncertainties.
Home insurance – some may know it as ‘fire insurance’ – will be useful when something happens to your property.
Home Insurance covers more than just your property and its belongings, it could be an accident that happened at home when you’re not around.
For example, if you’re trying out a new recipe and your kitchen accidentally caught fire damaging your neighbour’s unit, Home Insurance will take care of such lawsuits.
Mortgage Term VS Level Term
Many people know about life insurance, such as Term Plan or Whole Life Plan. We’re not so used to seeing these Mortgage Term products.
But unlike Term Plan which tends to have a fixed sum assured or premium payable, Mortgage Term Plan has no fixed sum assured or a fixed premium.
This would be the plan that most people are familiar with and interested in.
Basically, throughout the term, the coverage remains the same and only ends when the term is up. You may determine how long the term will be, and most Singaporeans will choose at least a term up to their retirement age.
The coverage decreases year by year, as the name suggests, and ends at $0 coverage when the term is over.
The reason for this is because your liabilities decrease as you pay off your loan, which corresponds to how much you ought to cover yourself.
Mortgage Term VS Home Protection Scheme (HPS)
Home Protection Scheme (HPS)
If the property owner buying a Design, Build and Sell Scheme (DBSS) or HDB flat and using your CPF-OA savings to make your monthly mortgage payments, you should already have a Home Protection Scheme (HPS) Mortgage-Reducing Term which you are automatically opt-in.
HPS is not compulsory if you signed up for a Mortgage Term Plan from the insurers.
HPS does not cover private residential properties, such as Executive Condominiums (ECs) or privatised Housing and Urban Development Company (HUDC) flats.
Mortgage Term Plan
Private insurers acknowledge that their mortgage insurance will not be claimed by everyone. Therefore, if the claim rate is low, you may be offered a refund or discount on your premiums. This will only occur if no claims have been made by the end of the policy term. You will not enjoy these incentives if you are insured under the Home Protection Scheme (HPS).
You can approach an insurer and purchase mortgage insurance plans. Alternatively, you can get your Mortgage Term Plan comparisons from the top providers in Singapore.
If you have taken out a bank loan for a private residential house, you usually have no mortgage insurance obligation (see your own agreement), yet having one is still highly recommended.
Should you get Mortgage Term Plan if you are on Home Protection Scheme (HPS)?
HPS is an effort led by the government to protect homeowners. That doesn’t mean that HPS is the cheaper option, though. There are situations where you will get more value for your money from private mortgage insurance.
For instance, if you are one of the property’s two co-owners, you need to purchase two HPS policies. This is because there are no joint policies offered by HPS. By buying joint mortgage insurance through a private insurer, you and your spouse will have a cheaper mortgage term plan.
Home Protection Scheme (HPS) provides only the most basic mortgage insurance coverage. Like Home Protection Scheme (HPS), you are permitted by private insurers to add riders to your mortgage term plan.
You can choose to add riders such as waiver rider, retrenchment rider or medical expense riders for Critical Illness (CI).
That implies you can increase your mortgage insurance coverage and protect you from more catastrophic events in your life.
Private insurers recognize that their mortgage insurance will not be claimed by everyone. Therefore, if the claim rate is low, you may be offered a refund or discount on your premiums.
This will only apply if by the end of the policy term you have not made any claims. You will not enjoy these incentives if you are insured under HPS.
Do you know you can pay for lower premiums for the same level of coverage?
Given the comparison of the following details:
- Outstanding Loan Amount of $1,000,000
- Loan Tenure of 30 years
- Market Interest Rate of 2%
- Male, Aged 30
We will take a look for the Home Protection Scheme (HPS) and a Mortgage Term Plan comparison:
Home Protection Scheme (HPS)
Mortgage Term Plan
As compared, there is a possibility that a Mortgage Term Plan may be cheaper than the Home Protection Scheme (HPS) and you can save on the premiums. You can get your Mortgage Term Plan comparisons from us if you want to save on the premiums!
However, as mentioned, HPS does not cover private residential properties, such as Executive Condominiums (ECs) or privatised Housing and Urban Development Company (HUDC) flats. Yet having a Mortgage Term Plan is still highly recommended.
Your home may be one of your biggest financial assets However, the property is one of the most illiquid assets. This can result in liquidity risk, which can turn into a difficult issue. In case of an accident, you may need a doctor’s surgery to save your life. Yet operations come at a cost, and your savings and emergency fund may be depleted
What happens if you don’t have enough cash to pay for your surgery and/or mortgage payment? You’re going to have to sell your home in a hurry, which puts you at buyers ‘ mercy. Buyers could use your situation to pay you for your home below the market price.