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Why is Mortgage Insurance Important?

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Most millennials are taught from a young age that owning a property, especially their own home, should be one of their life goals. This leads to them saving up diligently from the day they enter the workforce with the dream of owning a property someday, either for their own stay or investment purposes.

However, you should remember that getting the keys to your own property is not the endgame. Having signed the mortgage loan agreement, most will assume the best and expect to live until the loan is fully paid off. But in the unfortunate event that you are no longer around to pay off the loan, it is important to ensure that you leave behind an “ASSET” and not a “DEBT” for your loved ones.

Why should I have mortgage insurance?

These days, most mortgage tenures range from 30 to 35 years. This is a very long time and should unforeseen circumstances like pre-mature death, disability or serious illnesses occur, your joint-borrower or next of kin (spouse, parents, children etc.) will need to continue servicing this debt until it is fully repaid. In other words, your debt has become their liability. Therefore, it’s important to have mortgage insurance to protect against these risks even if the property is meant for investment purposes.

Some may argue that if the property is bought as an investment, it’s not necessary to have mortgage insurance as the property can be sold should the unforeseen happen. However, you must remember that the property market is cyclical in nature. What if tragedy strikes during a crisis or market downturn? Your next of kin may need to sell the property at distressed prices and suffer financial losses from the sale just to pay off your outstanding loan.

So in order to safeguard against these risks, it is very important to have mortgage insurance and also a will to smoothen the process for distribution of your estate. The two most common mortgage insurances are MLTA (Mortgage Level Term Assurance) and MRTA (Mortgage Reducing Term Assurance).

What’s the difference between MLTA and MRTA?

Generally, an MLTA offers not only protection for the amount of outstanding loan, but also functions as savings since the amount insured will be consistent throughout the duration of the loan. If nothing happens at the end of the loan tenure, you will receive back the total premium that was paid over the years. On the other hand, an MRTA covers the money owed to the bank from the loan. The coverage decreases over time and if nothing happens at the end of the loan tenure, you won’t get any money back.

As for the protection coverage, both MLTA and MRTA offer basic life coverage (Death or Total Permanent Disability) with the option to include critical illness coverage depending on your needs.

For MLTA, you can appoint anyone as your beneficiary whereas for MRTA, the sole beneficiary is the bank.

In addition, MLTA is also transferable which means you can sell off a property and replace it with another property under the same MLTA. Even if you refinance your loan, you do not need to replace it with a new MLTA. For MRTA, it is non-transferable as it is tied to your loan with the bank.  

In terms of cost, an MRTA is more affordable. The premium for MRTA is paid as a lump sum and can usually be bundled into the mortgage loan. As for MLTA, you can choose to pay your premiums on a monthly, quarterly, semi-annual, or annual basis.

So what should I do?

In most cases, the banks will typically offer you mortgage insurance (MRTA) together with the loan. However, it is not compulsory for you to take up this mortgage insurance from the bank so don’t feel pressured into getting it. Instead, seek consultation with your financial planner to discuss which option is best suited for you.

About the author

Billy Teoh (RFP) is a licenced financial planner that specialises in holistic financial planning and wealth management services. He has been in the financial services industry for 11 years and can be contacted at billy.teoh@ipp.com.my

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