What is mortgage insurance and do I need it?

Mortgage insurance, often referred to as a Mortgage Reducing Term Assurance (MRTA) or a decreasing term plan, is a life insurance policy that pays off your outstanding mortgage in the event of your death or total permanent disability during the loan tenure. While not always legally required, it is strongly recommended and in some cases mandated by the lender.

For HDB flat purchases where CPF OA savings are used to pay monthly housing instalments, the Home Protection Scheme (HPS) is compulsory. HPS is a mortgage-reducing insurance plan administered by CPF Board that ensures the outstanding HDB loan is paid off if the insured person dies, suffers terminal illness, or becomes totally and permanently disabled. HPS premiums are paid using CPF OA savings and are generally affordable. Coverage decreases in line with the reducing loan balance and continues until age 65 or until the loan is fully repaid, whichever is earlier.

For bank loans (both HDB flats and private properties), mortgage insurance is not legally mandatory but is strongly recommended. Banks may require it as a condition of the loan approval, particularly for higher LTV loans. Even when not required, having mortgage insurance protects your family from inheriting a large debt obligation in the event of unforeseen circumstances.

The cost of mortgage insurance depends on factors including the insured amount (your loan balance), your age, gender, health status, and whether you smoke. Premiums can be paid as a lump sum or in regular instalments, and they decrease over time as the outstanding loan balance reduces.

An alternative to dedicated mortgage insurance is a standalone term life insurance policy with a sum assured equal to or greater than your outstanding mortgage. This approach offers more flexibility - you can maintain the same sum assured even as your loan decreases, providing additional coverage for your family's other financial needs.

It is worth comparing premiums and terms across different insurers, as costs can vary significantly. Your CPF OA can be used to pay for HPS premiums and certain approved mortgage insurance plans.

Cashew encourages all borrowers to have adequate insurance coverage in place before or upon loan disbursement, and can connect you with insurance advisors who specialise in mortgage-related coverage.