Living your life is risky business! Especially if you’ve taken out a loan to buy that dream property of yours.
In the event that something unfortunate happens to you, it’s always better to have a fail-safe plan when it comes to protecting your loved ones… a plan B, let’s say.
That’s where mortgage assurance comes into play.
However, mortgage assurance policies can be very precarious. They can be complex and jargon-filled, leaving us wondering whether it’s worth taking out insurance at all.
Banks, property agents and brokers may also make you feel like you must take out mortgage assurance, when this is not necessarily the case (I’ll cover this in more detail below).
So how does it all work? I’ve put this little guide together to explain it all!
So, what is mortgage assurance?
Mortgage assurance is a type of insurance that will basically settle your outstanding property loan / mortgage if you are unable to do so in the event of death or total permanent disability.
To bring this into perspective, imagine are the sole bread-winner in your household. You and your family recently viewed a stunning property and decide to buy it with the help of a mortgage.
However, as the sole bread winner, you worry that your family may not be able to repay the mortgage in the event that you face critical illness or death.
You don’t want to burden your loved ones with the debt, so you decide to buy a mortgage assurance product that will protect your family in those circumstances.
Now, should those circumstances arise, you’ll have the comfort of knowing your mortgage is taken care of by the mortgage assurance policy.
PropertyLife Tip: Mortgage assurance plans are not compulsory by Bank Negara Malaysia. However, many banks may not lend unless you take out a policy, or they may at least offer a significantly better interest rate if you do. Don't feel pressured to buy your lender's policy - Bank Negara rules entitle you to shop around and take out a policy with another provider.
Now that we know what mortgage assurance is, let’s take a look at the various types available.
Mortgage Reducing Term Assurance (MRTA) is the most basic version of mortgage assurance, and you’ll find that many banks offer it.
In fact, it’s usually the most economical option and therefore very popular with property owners.
The two key things to know about MRTA are that (source):
In short, MRTA serves purely to pay off the outstanding mortgage balance to the bank, in the event of death or TPD.
What this generally means is that a one-off premium is paid, rather than a recurring premium that is paid mostly or annually, making it more affordable when compared to Mortgage Level Term Assurance (MLTA) - more on this below.
Many property buyers finance the premium by adding the cost of MRTA to their mortgage when they buy the property. As its more affordable, the addition to the monthly loan instalments doesn’t bite the wallet too much!
It’s the ‘reducing term’ component in MRTA that often leaves people confused. It simply means that the coverage slowly reduces in line with the outstanding balance of your mortgage until it reaches nil at the end of your mortgage.
PropertyLife Tip: A lot of people will have you think that MRTA is non-transferable when you sell your property and buy another. This is not necessarily true, although the process of transferring isn't easy.
You may have to ‘top-up’ the premium based on the property value, and transferring the policy between banks can be time-consuming and complicated. Make sure you check the terms and conditions with your mortgage assurance providers before taking out any specific policies.
Let’s work through an example.
Say you are purchasing a home valued at RM 300,000, and the bank offers you a loan at 80% loan to value (so RM 240,000) over a term of 20 years.
You decide to take out an MRTA policy to cover your 20-year loan, and you pay an up-front premium of say RM 12,500 (this depends on interest rates as well as the bank’s policy).
Ignoring any mortgage interest for now, your mortgage repayments would amount to RM 12,000 per year (RM 240,000 / 20). The MRTA will always cover whatever amount is outstanding on the mortgage balance at the point you become unable to pay the mortgage.
After five years, for example, you would have paid RM 60,000 (RM12,000 x 5 years) in mortgage repayments, leaving RM 180,000 outstanding on your mortgage.
So, if you were left with unable to pay your mortgage at this point, the MRTA policy would pay off the RM 180,000 outstanding mortgage balance directly to your bank.
After six years, it would be RM 168,000, after seven, RM 156,000 and so forth - right down to nil at the end of the mortgage term; hence the name “reducing term”.
Mortgage Level Term Assurance (MLTA) is another type of Mortgage Assurance. The key difference is that it offers more than just repayment of your outstanding mortgage balance.
MLTA also helps you ensure your loved ones receive some cash payout. It’s often seen as an alternative to life insurance as it offers both protection as well as cash benefit.
The two key things you need to know about MLTA are that:
Naturally, MLTA is more expensive as your family will also be eligible for a lump sum cash payout. The premium doesn’t need to be paid up front; it can be spread over the lifetime of the mortgage.
Now as it includes a cash payout over and above the mortgage settlement, age does matter when taking out MLTA - much like life insurance, so it pays to stay ahead of the game.
MLTA is also a lot easier to transfer between properties.
The ‘level term’ component of the MLTA basically means the coverage amount does not reduce to nil over the term. It stays level.
You decide to buy MLTA for the property mentioned above, rather than MRTA. The premium is RM 100 per month for the next 20 years.
In the likely event (!) that nothing happens to you during that 20 year period, you will receive the cash value of RM 24,000 at the end of the term.
If, however, something unfortunate happens in say year 12, then the insurance company will pay off the remaining balance on the mortgage and a person you nominate will receive the RM 24,000 cash pay out.
See how the additional protection comes in?
There’s no hard and fast rule when it comes to choosing a type of mortgage assurance.
A quick search on Google will reveal people debating the pros and cons of each policy on the property forums. Ultimately this judgment depends on your circumstances…!
Here’s some tips to help you get started (source):
As the beneficiary for MRTA is the bank (and protects their loan to you!) most banks offer MRTA. From Maybank to Citibank, to CIMB, and any bank in between, most will be happy to help with offering you an MRTA plan.
On the other hand, insurance companies usually offer MLTA. Remember MLTA can also be a hybrid of life insurance; so having an insurance company in on this would be beneficial for everyone..
And there you have it. The ins and outs of mortgage assurance in Malaysia, and how they may apply to you. Taking out any financial product is a big deal, and it’s always great to have done your research ahead of time.
We hope this article helped you in your quest for finding the perfect mortgage insurance plan. Drop us a line or two with your perspective, as well. We’d love that!
I’m a Dutch-born property enthusiast who spent a good part of my youth in Penang, Malaysia. Besides being a founder @ PropertyLife, I have experience in financial services both at start-up and corporate level. I founded and sold FundTheGap and I’m ex-Accenture, where I worked for some of the world’s biggest banks. Besides property, my main interests include technology, entrepreneurship, internet marketing, travelling and generally all things ‘disruptive innovation’.