Who pays for the Outstanding Mortgage Loan if the Owner Passes Away?
Purchasing a property in Singapore will be one of the biggest financial decisions that we can make in our lifetime.
More often than not, we would also need to rely on a loan from the bank to help fulfill our home ownership aspirations.
Usually, the focus will be on interest rates and monthly instalment payments with contingencies put in place to manage such possible fluctuations.
However, less thought may be placed on potential but serious events like disability and death.
First, let us take a look at an example of the expected monthly loan repayment based on the following:
Property Valuation Price: $1,500,000
Loan Amount: $1,125,000 (Loan to value 75% of $1.5m)
Interest Rate: 2.5% p.a
Loan Duration: 30 years
Monthly Installment: $4,445
Based on an average private property price of $1.5 million. The full loan amount at 75% LTV will be $1.125 million.
With an interest rate of 2.5% per annum, over 30 years, the monthly loan repayment will work out to be $4,445 per month.
For this example, we will assume that interest stays the same throughout the loan tenure and at the halfway mark (15 years), the outstanding loan amount will be $666,643.
Now, what happens if the single owner were to pass away at this juncture?
Typically, the beneficiaries will be required to pay off this outstanding loan amount when the single borrower passes away.
Given the generally high pricing of property and other measures that the government has put in place to ensure prudent financial planning (eg. Loan Tenure limits, Loan-to-Value Limits, Total Debt Serving Ratio etc.), joint-ownership and borrowing will be very common.
This then will mean that the remaining borrower will have to take on the duty of servicing the loan.
BUT, the bank will have to do another loan assessment based solely on the remaining borrower.
Among other things, borrowers here are bound by a limitation known as the Total Debt Servicing Ratio (TDSR). According to the TDSR, your monthly mortgage payment cannot be more than 55% of your monthly assessable income, including any other debts like credit card bills and personal loans.
Therefore, two borrowers with a total joint monthly income of $10,000 (and with no other debts) will have a TDSR limit of $5,500. If the remaining borrower has an income of $5000, the TDR limit of $2,750 will apply. This will therefore greatly affect the loan and repayment ability.
Given that the monthly instalment is now greater than the TDSR, the surviving borrower can either:
Reduce the loan amount (by paying up a lump sum) such that the monthly repayments fall within the TDSR limits.
Or sell the Property.
Both of which may not be ideal as it can increase financial strain and uncertainty. Having to vacate a home due to a love one passing on can also be traumatising especially if there is sentimental value attached to the property.
So, what can we do to mitigate such a situation from happening?
Mortgage insurance is a form of insurance that pays off your outstanding home loan, in the event of a borrower’s death or Total Permanent Disability (TPD).
This helps to ensure that the remaining owner or the beneficiaries are not suddenly saddled with a huge debt of which they may not be able to afford.
Simply put, a mortgage insurance's core function is to help your partner or family to foot the rest of your home loan in the event that you pass on or become totally disabled.
If you own a HDB flat and are paying for your home loan by CPF, you will, by default, be enrolled into the Home Protection Scheme by CPF. The Home Protection Scheme (HPS) is a mortgage insurance which decreases in coverage and value over time.
There are also other options from Private Insurers which may provide more features and benefits and can be worth exploring.
But, if you own a private house, you will not have any sort of mortgage insurance by default. You will have to find a private insurance company to get one.
What about COST? Depending on the age of the borrower, the loan amount, coverage needed and other factors, the cost need not be expensive. For example, based on a $1,000,000 coverage for a someone who is 30 years old, the annual premium can work out to be about $650 per year. With different insurance companies offering different terms, features and discounts, this amount can vary as well. Therefore, it will be good to compare between insurers before settling on one. While this may seem like additional cost, it is one worth paying for peace of mind and certainty. If the unfortunate indeed were to happen, it essentially will protect you and your love ones financially.