What Will Happen To Your Property If You Pass On Suddenly?
Homeowners often overlook mortgage insurance.
I learned this when I was a financial consultant for five years (while I was also a property agent at the same time).
Insurance is the most fundamental yet most neglected need because it is only for ‘just-in-case-it-happens’ scenario.
Death is a topic that many people don’t like to talk about; but as pantang (superstitious) as it may be, Singaporean homeowners must be aware of it. Consider that many of us buy homes with our spouses or other loved ones: what happens if one day, we’re suddenly not around to pay our end of the mortgage?
Many Singaporeans are sole breadwinners. If your family is reliant on you, how will they keep their home if something happens to you?
Don’t just focus on property accumulation to the neglect of property protection.
A True Story
Several years ago, I knew of this man in his mid-thirties who bought a $1.5m apartment with his mother as a joint-owner. Not long after he bought the house, he suddenly collapsed and died at his workplace.
His mother was a retiree, and she had no means to pay for the home loan.
So she had to sell the house quick. She was able to plea successfully to URA for a waiver on the applicable Seller Stamp Duty (SSD).
I managed to find a buyer for the house, but since it was an urgent sale, it was sold at a loss.
This sad scenario could have been avoided if the son had bought mortgage insurance.
What Happens If You Don’t Have Mortgage Insurance?
For private properties, mortgage insurance is optional, unlike HDB flats. If you don’t have it, then two things can happen:
First, if the mortgage is solely under your name, your family will not inherit the mortgage. This is not as great as it sounds, as it typically means the bank will foreclose on the property and sell it. The exception is if someone in your family can quickly take on the mortgage in your place.
If someone has co-signed the mortgage with you, he/she will then be liable for the full mortgage loan. If he/she cannot qualify for the loan, or cannot service it, then the bank has a right to foreclose on the property.
Note that this happens immediately when you pass on with an outstanding mortgage. There is little or no time for your family to adjust, your spouse to find and start a new job, etc.
Is The Surviving Co-Mortgagor Qualify For The Full Loan?
Taking on the mortgage doesn’t just mean willingness to pay; your replacement needs to qualify for the loan
Say you purchase a property with a loan of $1 million. This loan is on a 25-year tenure, at an interest rate of two per cent per annum (all quite typical for a condo). The monthly repayments come up to around $4,200 per month.
Now to qualify for a loan, you need to meet something called the Total Debt Servicing Ratio (TDSR). Under the TDSR framework, the borrower’s monthly loan obligations (including personal loans, car loans, etc.) cannot exceed 60 per cent of the monthly income.
So at $4,200 per month, a single person taking on your mortgage must be earning at least $7,000 per month. This is assuming he/she has no other debt obligations besides the home loan.
It gets worse: if this other person has a variable income (e.g. he/she is self-employed), his/her assessable income takes a 30 per cent ‘haircut”. So if the average monthly income is $7,000 a month, it will be treated at just $4,900. To qualify for the mortgage loan, they would need an average income of above $9,000 per month.
Furthermore, the person taking over the mortgage must be able to repay any missed mortgage payments in the past. As you can see, it’s not easy to just take over the loan; and in some families, this will be outright impossible.
The Solution Is Mortgage Insurance
All HDB flat owners are required to cover under the Home Protection Scheme (HPS), which is a form of mortgage insurance (subsequently they can change to mortgage insurance by a private insurer). With the HPS, the remaining flat loan is instantly repaid should the owner passes away.
For private property, however, mortgage insurance is not compulsory. The government leaves it to you to decide if you want it. You’ll have to get your own Mortgage Insurance or Mortgage Reducing Term Assurance (MRTA), available from different private insurers.
What is Mortgage Insurance?
You can only buy a mortgage insurance policy with proof of a bank loan.
It is not necessary to cover 100% of the loan amount though it is advisable.
Mortgage insurance is a “reducing term” policy because the coverage decreases every year since your mortgage is gradually being paid off.
In most cases, premiums in the last three years (can be more or less depending on the insurers) of the policy term are zero because by then, the coverage will be very minimal.
Mortgage insurance can also come with optional riders, such as coverage for Total Permanent Disability (TPD), personal accident coverage, critical illness waiver and others (depends on the insurers).
Do note that some mortgage insurance policies also come with rebates; they will refund you a small portion at the end of the loan tenure, if you don’t make any claims.
A qualified Financial Consultant can help to explain these in detail.
Premiums for Mortgage Insurance is Lower Than a Level Term Insurance
These are the actual quotations of mortgage insurance by a private insurer
Husband and wife are both 30 years old; non-smokers
Term: 25 years
Joint life mortgage loan insurance: $800 per year
Level term coverage:
Husband: $612 per year
Wife: $460.80 per year
Total: $1,072.80 per year
Husband and wife are both 40 years old; non-smokers
Term: 25 years
Joint life mortgage loan insurance: $1,764 per year
Level term coverage:
Husband: $1,346.40 per year
Wife: $957.60 per year
Total: $2,304 per year
As you can see, the premiums for the level term insurance policy are more than 30% higher than mortgage insurance. This is because the payout for a level term insurance is the full insured amount ($800,000 in this case) throughout the entire tenure (25 years).
On the other hand, the payout for mortgage insurance will be lesser with each passing year, usually at an average reducing rate of 2-3 per cent per annum.
Some would prefer paying the extra premiums for a level term insurance instead of mortgage insurance because of the extra coverage. The choice is yours (consult your financial consultant).
If the property is in your name and your spouse name, be sure to buy 100% coverage for each and not 50%/50%. If you do so, if something happens to one spouse, only 50% of the outstanding loan is covered.
Difference Between Home Protection Scheme (HPS) and Mortgage Insurance
For HDB flat owners they can opt between HPS and Mortgage Insurance. Whichever is the choice, it is compulsory for HDB owners.
HPS is not necessarily cheaper than private insurers, so it may be worth shopping around to compare. You may start with HPS but can change to mortgage insurance subsequently.
Most people start with HPS at the point of buying a flat and stick to it because CPF can be used to pay for the premium, whereas private insurer mortgage insurance is only payable with cash.
One important distinction is HPS payout is not made directly to the insured in cash. It directly settles the outstanding loan.
On the other hand, for mortgage insurance, the insurer pays in cash to the family of the insured party. The family then has the liberty of how they want to use the money. If they choose to sell the property, they can keep the payout. Or they can use the payout to settle the loan.
You Can Choose To Keep Your Mortgage Insurance When You Sell Your Property
One other interesting aspect of mortgage insurance is the policy doesn’t automatically stop when you sell your property, unlike HPS.
You can choose to maintain the policy and treat it as a ‘term insurance’. The mortgage insurance policy is not ‘attached’ to the original property.
It might be useful to keep the policy in case you become ‘uninsurable’ for a new insurance policy due to health reasons.
Talk to your insurer to see how all this work.
Why Can’t My Family Just Quickly Sell My House When I Die?
This is a terrible idea.
Firstly, your family still needs a roof over their head if that your sole property.
Secondly, the shorter the time frame to sell your home, the less you are likely to get. This is why I always emphasise having sufficient holding power to avoid these situations (follow me on Facebook, where I will soon share how to minimise losses in such cases).
For now, suffice it to say that your family could end up getting a pittance on what the property is truly worth. Selling a property under distress can incur serious financial losses, wiping out whatever gains you’ve built up over the years.
But if I already have life insurance, what is the point of Mortgage Insurance?
Your insurer will be able to advise you that life insurance and mortgage insurance both serve a different purpose (the problem is many people do not know why they buy any policy).
Mortgage insurance protects you against outstanding housing loans.
Life insurance provides for your family members in the event of unforeseen death or permanent disability.
If you do not have mortgage insurance, do consider how much of the life insurance payout will be “swallowed” up by your outstanding home loan.
For example, if the outstanding housing loan is another $600,000 when you pass on, how much will be left for your family after settling the bill? Remember that your family still has other needs such as utilities, children’s education, daily expenses and other outstanding loans.
In some cases, the payout from life insurance may not even suffice to cover the outstanding mortgage (e.g if you are insured for $500,000, but the outstanding home loan is $700,000).
Almost invariably, it doesn’t make sense to buy life insurance but skip mortgage insurance.
Don’t let your family members sacrifice their lifestyle just because you want to save on the relatively low mortgage insurance premiums.
Also, it’s best not to take things for granted. Life insurance doesn’t always pay out immediately – there may be anywhere from a few weeks to even a few months for the cheque to arrive (if there are complications). Your family may not have time to settle the mortgage with the bank.
In short, don’t skimp – don’t save a few hundred dollars a year, to put a million-dollar asset at risk.
Given the amount you’ve invested in your property, it makes no financial sense to leave it unprotected.
Do purchase mortgage insurance to ensure that your family can fully benefit from your property investment efforts over the years. Feel free to contact me directly (or book me for a zoom meeting using the calendar below) if you need help or have questions.
Danny Han has been a licensed real estate agent since 2005. He also had five years of experience as a financial consultant. The insights and knowledge he shares in his blogs are the results of years of experience in helping many of his clients in their Property Wealth Planning.
Prior to becoming a real estate agent, Danny was a full-time church pastor (don’t be shocked!) for 23 years. Even now, he is still actively involved in church work and preaches regularly. He has also made six mission trips to Myanmar to-date.
Danny is a foodie, so during his spare time he would go with his kakis to try different “CNG” (cheap and good) food. (Be sure to check out his Holland food blog in this site).
Do feel free to drop him a Whatsapp message for a non-obligatory discussion if you are planning to grow your property wealth.