Mortgage/Home insurance is a topic seldom discussed in Singapore and we feel that it is important to cover the basics as life events can significantly affect you or your beneficiaries.
There are many different policies to insuring your home, and we like to address some of the common misconceptions and provide further elaboration and actions you can take right now so as to protect against any unforeseeable events.
It is important to clearly define what is mortgage insurance and home insurance.
Mortgage insurance refers to insurance which covers mortgage loans in the event of a life-changing scenario. The most basic explanation is that in the event of your passing, the house will be automatically paid off by the insurance company.
Home insurance refers to the coverage of the property itself. This could be the result of any damages to its infrastructure or your belongings within the property.
Q: I already have insurance when I purchased my flat from HDB!
A: The type of insurance upon purchasing a flat from HDB will usually be two kinds and will be compulsory. One is fire insurance when you take a HDB loan and another policy is the Home Protection Scheme (HPS) when you are using your CPF savings to service the mortgage.
This fire insurance that you have taken covers only the HDB flat infrastructure and not to the loss or damage to your belongings located inside. An easier way to understand this is that it will only cover everything that you see when you first move into the HDB flat.
The Home Protection Scheme is a form of mortgage insurance that covers the mortgage payments in the event of the owners' untimely passing. This will ensure that the remaining occupiers of the flat will have a place to stay and will not be left homeless.
Q: Why will I need home insurance from a 3rd party insurer? It is very unlikely that there will be a fire in my property or my belongings being stolen!
A: This statement is true and yes; such events are very unlikely. However, a low probability event does not mean it will not happen. There are still risks. To put this event in another perspective, if you have a life/term/motor insurance to cover something so important to you, why shouldn’t your home be any different?
Q: Since I am already covered under HPS, there is no need for me to look into getting mortgage insurance from a 3rd part insurer.
A: For a HDB flat, you are covered adequately. However, what about if you are intending to upgrade to private property? The HPS coverage is not transferrable and will be terminated when you sell your flat or have fully paid up your HDB flat. In this case, you will need to get mortgage insurance for cover. If you are looking into purchasing another HDB flat, you will need to reapply the HPS again. This might result in additional expense than previously planned as premiums will increase with age, which is similar to life/term insurance.
An extra benefit to getting a policy from 3rd party insurers is that you can look into additional riders suiting your requirements.
If it is a private property, you will need to first consider how your beneficiaries of the property will be able to afford payments to it upon inheritance.
Q: In case my beneficiaries are unable to meet the mortgage payments for the private property, they can always sell the house.
A: This question is linked to my previous article relating to property inheritance, this is an option, but might not be the most suitable in the case for your beneficiaries. If the property is occupied by your beneficiaries, this also means that they will be losing their homes when they have to sell the property under distress.
Furthermore, a property that is sold under distress will usually be transacted at a less than favorable asking price which is not ideal. Being transacted at a poor price might result in your beneficiaries not being able to source for a similar residential property to occupy and will result in a big lifestyle change. In addition, this may lead to your beneficiaries not having a permanent home and might require renting for the time being.
I will like to clarify that renting is not a bad option to consider. However, my advice is for the beneficiary to have in place a long-term real estate plan with the intention to hold property as a good moat against inflation.
Renting for long periods should be done only by investors who have keen acumen with other financial instruments that have the capability to beat capital gains and the rental yield on residential property.
Q: I have taken a bank loan on my property previously and is covered by an insurance called Mortgagee Interest Policy (MIP).
A: The MIP protects the interest of the mortgagee – the banks, in the event that you are unable to service your loan after damages to the existing property due to property damage. This is similar to the HDB fire insurance in which the infrastructure of the property is covered, but not your belongings. To clarify further, in case you are wondering if this will affect your mortgage loan – This does not and you will have to still make repayments in the event of your untimely passing.
Q: In the event where I pass on, my life/term insurance will be able to cover the mortgage loan for the property.
A: Filing a death claim will result in a payout, but does not necessarily mean that it will be enough to cover the total loan. However, some of the benefits for a life/term insurance is that the payout will be going directly to the beneficiaries instead of the creditor. Furthermore, the sum assured for life/term insurance can be greater than mortgage insurance. This is because the sum assured for mortgage insurance will decrease according to the repaid amount. This will also lead to lower premiums to be paid overtime, as the sum assured decreases.
Q: My beneficiaries will make the payment of the mortgage loan after deduction from claims, which will be a small amount.
A: The remaining loan quantum might be a manageable amount; however, your beneficiaries will have to fulfill Total Debt Servicing Ratio (TDSR) which is based of their age and gross monthly income. The TDSR is set in place to prevent overleveraging. In the event where they are unable to fulfill the TDSR criteria, the property will still have to be sold off.
Interested in looking for a suitable mortgage/home insurance plan? You can consult the banks in which you are currently paying your loans. There are usually special arrangements between the banks and 3rd party insurance in which they can offer you competitive rates.
If you require more information on taking the next step to plan your property journey, do contact +6596329840 or email us at estatemagnates@gmail.com!
The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee, or other group or individual. The author does not accept any responsibility whatsoever for any harm or loss arising from accessing or relying on information contained in this blog post.
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