What is mortgage insurance?

If something happens to your income and you miss one too many mortgage payments, you and your family might find yourselves out on the streets without a roof over your heads. Mortgage insurance is designed to protect you and your family when you are unable to make your home loan repayments. Should you find yourself unable to service your mortgage repayments for the entirety of your home loan tenure, you can make a claim to the insurer and get them to pay off your home loan. Of course, you can�t make a mortgage insurance claim just because you spent too much money on your last overseas holiday and now have no more cash for the month�s home loan instalments. Your mortgage insurance plan will only give payouts if certain specified events occur and leave you or your family unable to make your loan repayments and are therefore at risk of having your house seized back by a bank. And these events must be pretty serious�like you die or become totally and permanently disabled. If that happens, you or your family will receive a lump sump payout that can be used to repay the rest of the home loan. Pretty simple right?

Why would you need mortgage insurance?

First, it is important to understand the consequences of not being able to repay your home loan. As your home has been put up as collateral, the bank has the right to foreclose your home if you miss your mortgage payments one time too many. That means they�ll basically seize possession of your home, auction it and take the proceeds to make up for the money you owe them. Ouch. If it�s a home you and your family are living in, it also means you will lose the roof over your heads. Unless your home is something you can well afford to lose (eg. if you�re a tycoon buying your 50th investment property), mortgage insurance is highly recommended. However, there are some situations where you should absolutely, 100% consider buying mortgage insurance. Here are some questions to ask yourself.

Should Policy buyers protected under the Home Protection Scheme still buy mortgage insurance?

While the Home Protection Scheme (HPS) is compulsory for Policy buyers who are using CPF funds to repay their home loans, you can apply to be exempted from this requirement if you have one of the following policies:

That last item on the list, MRTA, is basically mortgage insurance. That means that if you find a mortgage insurance policy you think is better than the HPS, you�re welcome to sign up for it and then get exempted from the latter.

Now, why would you want to do that? Well, there are some advantages private mortgage policies offer over the HPS, such as the following.

You could end up paying lower premiums

Don�t assume that the HPS is cheaper just because it�s a government-led initiative. If you do the math, you�ll find that mortgage insurance from private providers can be cheaper than the HPS.

This is particularly pertinent if you�re purchasing a flat together with your spouse or a family member. The HPS will issue two policies instead of one joint one, and each of you will have to pay your premiums individually.

On the other hand, not only do private insurers provide joint policies which often work out to be cheaper overall than two HPS policies, but some might even offer discounts when you sign up as a couple.

Which brings us to our next point…

You can get a joint insurance plan with your co-purchaser

There are some advantages to you and a co-purchaser being insured jointly under one private mortgage insurance plan, rather than separately under the Home Protection Scheme.

Having a joint mortgage insurance scheme means your co-purchaser will automatically be granted the proceeds of the policy should you pass away. These proceeds are usually paid out in a lump sum, in cash. They are meant to be used to repay the home loan, but you or your co-purchaser are actually free to decide how to use it and can put it towards more pressing needs, or invest it.

On the other hand, with the HPS, you and your co-purchaser won�t actually see the money. It will be paid directly to the Policy. So there is a lot less flexibility.

You can continue your mortgage insurance if you upgrade to a new property

Mortgage insurance policies can usually be transferred to a new property if you decide to sell your current home and upgrade to a new one, whether Policy or private.

The HPS, on the other hand, is terminated upon the sale of your flat or when you have fully repaid your loan.

Why should you care? Well, premiums can rise according to your age when you sign up for a policy. You thus want to lock in a lower price by purchasing your insurance plan as early as possible.

You can include add-ons for better protection

Many private insurers offer additional riders that allow you to protect yourself even more.

For instance, you might be given the option to add a critical illness rider, to opt to have your premiums waived, or to get coverage if you get retrenched. Other riders could include medical expense coverage or personal injury coverage.

The HPS cannot be supplemented with riders, thus you�ll have to make do with the basic protection it offers.

You might be able to get your premiums refunded

Some private plans will offer you a refund or discount on your premiums if you have not made any claims by the end of the policy term. There are no such advantages with the HPS.

You don�t have to pay your premiums using CPF

Policy automatically deducts your HPS premiums from your CPF OA every year. With private mortgage insurance, you can pay your premiums in cash or by credit card. If you use a credit card that rewards you for insurance premiums, that should be your preferred mode of payment.