Buying a home is the biggest single financial commitment that most of us will ever make. In Malaysia, it will take the average homeowner up to 35 years to fully repay their mortgage.
Providing a roof over the heads of our loved ones is one of the most basic things we can do to protect and support them. However, if something bad does happen to you (touch wood!) and results in your inability to settle the mortgage in full, a home can end up being a financial burden for your nearest and dearest.
This is where Mortgage Reducing Term Assurance (MRTA) and Mortgage Level Term Assurance (MLTA) come in.
Both MRTA and MLTA serve as a form of protection for borrowers by helping them settle their outstanding mortgage should something unfortunate occur. Simply put, it is insurance for your mortgage.
MRTA is often seen as a more convenient option, as it is typically packaged as an option together with your home loan.
Meanwhile, MLTA is closer to nature to traditional life insurance policies and must be taken up separately with third party insurance providers. Premiums are higher than MRTAs, and are paid on a monthly, quarterly, half-yearly, or yearly basis.
Given the nature of these products, it is only appropriate that bankers will promote MRTA while insurance agents advocate MLTA. No prizes for guessing who gets commission for which product.
Despite these distinct differences, there are still a number of misconceptions surrounding these two products. Here are 6 myths about MRTA and MLTA that aren’t true at all.
Myth #1: MRTA is compulsory
Despite this popular notion and your banker’s insistence, MRTA is not compulsory. Bank Negara does not state this.
However, home buyers are strongly encouraged to have some form of protection for financial planning. Most banks also tend to offer a better loan package if you purchase a MRTA with them.
At the end of the day, mortgage insurance is simply bought as a coverage so that if anything bad happens (and you can never see them coming), you and your loved ones will not be burdened with mortgage payments.
Myth #2: MRTA is non-transferable
Can MRTA be transferred? The answer is actually yes – you can transfer your MRTA to the next property that you buy. But this can quickly get tricky.
For example, you purchase MRTA for Property A, worth RM500,000. You pay a one-time premium of RM11,500 for the MRTA. Five years later, your coverage reduces to RM400,000 (your MRTA coverage reduces over time, hence the term “reducing term”).
Later on, you decide to move into a smaller property unit – let’s call it Property B and it is valued at RM350,000. If you choose to sell Property A, you have the option of transferring your existing MRTA to Property B, since the remaining MRTA coverage is about RM400,000, and is hence sufficient to cover Property B.
However, if you choose to buy a higher valued Property C, which will cost RM600,000 – your existing MRTA coverage will not be sufficient to cover for the risks. In this case, you have the option of topping up for the remaining RM200,000 coverage (unless you like to live dangerously).
In some cases, it might make more financial sense to purchase a new policy rather than topping up an existing one. Transferring MRTA from one bank to another is also complicated. Terms and conditions also vary from bank to bank. Check with your local bankers to find out which option is best for your situation.
[sc:sample_banner]Myth #3: All MLTA is term assurance
Most MLTA is term assurance. However, there are cases where MLTA come with whole life plans or investment-linked insurance plans.
It still fulfils the main purpose of covering your mortgage in the event of death or TPD, but you pay a higher premium for it due to the longer protection duration.
It is best that you first consider the protection you require and plan accordingly. For instance, if you are planning to pay off your mortgage within a few years, then an MRTA or MLTA may not be at the top of your priority list. However, if you are planning to service it for the next 30 to 35 years, it will be best if you are protected.
Myth #4: MRTA and MLTA coverage are insufficient
Basic MRTA and MLTA plans do not cover critical illness. However, most MLTA do come with the option of including a medical rider for critical illnesses. MRTA does not.
In a gist, MRTA would be more suitable for those who already have adequate medical insurance, and do not have many (or any) financial dependents. This type of insurance will take care solely of your home loan if it is not fully repaid in the event of TPD or death. In an MRTA plan, the beneficiary is the bank and your family members will not get a single cent should the worst happen, but they will get the property.
Meanwhile, if you have more than one financial dependents and require extra protection, then you might want to consider MLTA, as it also has a cash value at the end of the policy.
Statistically, most people will go through a critical disease at one point of their lives. The National Cancer Society of Malaysia estimates that one in four Malaysians will develop cancer by the age of 75.
When you think about it, purchasing a home is a commitment that spans at least three decades for most, so you need to consider all these risks and really put some serious thought into getting a sufficient coverage plan.
Myth #5: MLTA offers “free” protection
The conception that MLTA offers “free” protection is derived from the MLTA proponent that offers a guaranteed cash value back at the end of the tenure. But do keep in mind that the guaranteed portion will differ from policy to policy.
Also, before you jump to purchase a MLTA plan, do consider that it will cost roughly 10x more than MRTA. Also look at factors like inflation, which could eat into your cash value over the long term. To counteract this, some MLTA plans incorporate an investment portion to it.
Meanwhile, with MRTA, the cash value basically goes down to zero at the end of the loan tenure. However, if the mortgage is settled early, the MRTA can be surrendered for cash value.
Myth #6: MRTA is not affected by fluctuations in Base Rate (BR)
This is true only if your MRTA covers the full home loan amount and the full loan tenure.
When home loans were still based on the Base Lending Rate (BLR), MRTA was not really affected because historically the BLR did not fluctuate much. However, the new base rate (BR) was designed to allow individual banks to adjust their rates, hence more fluctuations are expected.
Generally, fluctuations in base rate (BR) will only affect your MRTA if your coverage is below your loan amount. If you purchase coverage for the full loan amount, your MRTA is not likely to be affected because the interest rate used to calculate MRTA is usually higher than your home loan interest rate.
However, if you are a property investor, or are already sufficiently protected via life and medical insurance, you will most probably opt for a shorter or lower coverage amount for MRTA, if you decide to buy any. If that is the case, your MRTA will most like be affected by fluctuations in the base rate.
So, should you get a MRTA or MLTA for your mortgage? Well, as clichéd as this sounds, this depends on a number of factors that include your financial objectives (whether you are buying a property for investment or for your own accommodation), overall insurance protection, number of financial dependents, and of course, your budget.
Either way, it is best that you get some form of coverage to safeguard your mortgage because you never know when you might just need it.
Looking to set some cash aside for your down payment? You can save money while you spend by using a credit card that complements your lifestyle.
