Overview of Mortgage Insurance and Its Purpose
When you think of insurance, the first type of insurance that crosses your mind is probably: health insurance. Or even life insurance, accident insurance, car insurance, travel insurance or house insurance. Mortgage insurance, to many, is a foreign term. However, it is an important type of insurance too. Hence, we will be introducing mortgage insurance to you in this article.
Mortgage insurance is a policy where your family members are safeguarded from repaying the outstanding loan balance of your mortgage in the case of unfortunate events. Such as death, terminal illness or total and permanent disability. The lump sum payment can be used to pay for the outstanding home loan. So your loved ones will continue to have a place to live in.
The purpose of mortgage insurance is to ensure that should an unfortunate event happen, your family members will not lose their roofs over their heads. This is because if your family members are unable to repay the outstanding loan amount, their home may be lost. I am sure this is the worst-case scenario that you would want to avoid. A mortgage can be a huge financial burden to your loved ones. So, purchasing mortgage insurance is the best solution to avoid undesirable scenarios from occurring!
Types of Mortgage Insurance and Their Coverage
Now that you know the importance of mortgage insurance, we’ll dive into the types of mortgage insurance and their coverage. So that you can find the type that suits you best.
The first type of mortgage insurance is the Home Protection Scheme (HPS) offered by CPF.
HPS is a mortgage-reducing insurance which protects your family members from losing their HDB flat. It is for CPF members who are owners of HDB flats and utilizing CPF funds or cash to pay for their housing loan monthly payment. HPS insures members until they are 65 years old or until the mortgages are fully repaid. Your single premium will insure you till you reach 55-60 years old. After which, it will be converted to an annual premium cover.
Do note that HPS does not apply to executive condominiums (ECs) or privatized Housing and Urban Development Company flats. If you are using CPF funds to pay for your monthly housing loan payments, HPS is compulsory. Being in good health is essential to being eligible to be covered under HPS. Keep in mind that false health declarations can lead to your HPS being voided and claims being denied. In addition, premiums paid will not be refunded. You can still utilize your CPF funds to pay for your monthly mortgage payments in the event that you are ineligible for HPS.
If a claim is made, you can be assured that HPS will cover the outstanding loan balance, up to the insured amount based on the proportion of share applied, with HDB or the mortgagee directly. HPS’s premiums is one of the most affordable in the market. Yearly premiums are paid using funds from your Ordinary Account (OA) automatically. Hence, it is important that you have sufficient funds in your OA to ensure that premium payments can be made. If you fail to make your premium payments on time, you could lose your coverage and reapplication for HPS will be required. Rest assured that CPF will notify you to top up your OA if the balance is insufficient to pay for your premium or your family members who are co-owners can authorize CPF to use their OA funds to pay for your premium shortfall.
Your proportion of HPS cover should minimally match the fraction of your monthly housing loan payment paid by your CPF funds &/or cash.
The total share of cover per household should add up to a minimum of 100%. You and your co-owner(s) can each opt to insure for a larger proportion of cover, up to 100% per owner. A larger proportion of cover leads to a higher yearly premium so do take your future retirement needs into consideration when deciding the proportion of cover. Based on the proportion of cover you decided on, you can use the HPS Premium Calculator to estimate your premium.
In the event that the tenure or amount of your loan changes, make sure you adjust your HPS cover so that you are covered adequately. If you use your CPF funds to repay your loan, no application is required. The adjustment is automatic if the loan amount &/or tenure is reduced. Notification will be given if it is increased. For refinancing, adjustment is automatic as well. If your loan is from the bank and cash is used to repay your loan or change the tenure, an online application is required.
If you are taking an HDB loan, you can apply for HPS and apply to withdraw your CPF funds for your monthly mortgage payments through HDB concurrently. If you are taking a bank loan or not utilizing your CPF funds to pay for your mortgage, you can submit an online application instead.
Your HPS cover ends when you:
1) sell your HDB flat
2) fully redeem your mortgage, or
3) start a new HPS cover for your new flat.
The second type of mortgage insurance is those offered by insurance firms and banks.
They can be Mortgage Reducing Term Assurance (MRTA) or Level Term Assurance (LTA). For MRTA, your coverage sum reduces with your outstanding loan balance so premiums are lower. Whereas for LTA, the coverage sum is constant so premiums are higher. When choosing mortgage insurance, consider whether it gives a full refund of your premiums if no claims are made. Remember to choose the mortgage insurance that suits your outstanding loan balance, mortgage’s interest rate and loan tenure best!
