|Housing loan amount (90% financing)
|Total cost of premiums
|Paid in one lump sum at the beginning
|Paid on monthly basis – so the payments are stretched out over 30 years
So you recently purchased a house in Malaysia and can’t seem to decide between MRTA and MLTA? We go over the pros and cons to help you decide which mortgage insurance offers better protection.
A house is probably the greatest investment made by most individuals and many Malaysians aspire to make their home ownership dreams come true. As a homeowner, you must think about the potential risks too; namely, what happens to your home and family should something unfortunate were to happen to you?
Who will then take up the financial obligation of paying off your mortgage instalments? Enter mortgage insurance plans which is an insurance that will cover your outstanding housing loan if you are unable to do so in the event of death or total permanent disability.
Here we detail two of the most common options available for Malaysian homeowners plus a third alternative unknown to many.
1. What is MRTA?
MRTA or mortgage reducing term assurance is the most popular and economical option for property loan borrowers and is usually packaged as an option when applying for a housing loan at a bank. It is a single premium group term life insurance that pays your outstanding home loan in event of your death or total permanent disability (TPD).
Its reducing term element means your coverage will gradually reduce in line with your outstanding housing loan until it reaches zero at the end of the tenure. In event of your death or TPD, the benefits derived from this mortgage insurance will go directly to the bank to settle your outstanding loan and your family members will not receive any cash benefit from it. This is because the bank serves as the beneficiary of an MRTA policy.
You have the option to select the coverage amount and tenure of your policy while the premium charged will depend on your age, gender, etc. The premium is paid up-front as a lump sum. Most homebuyers top up this amount to their mortgage value as most banks offer a lower interest rate on your home loan should you opt to sign up for an MRTA.
Of course, you can also opt to buy it later but in that case, you need to have sufficient money to pay off the lump sum premium on your own. This unnecessary debt may come as a shocker for the deceased’s family and add to their already tough situation.
Where can you purchase MRTA?
Banks are allies of MRTA as the beneficiary of the policy are banks. So, most banks will highly recommend you to opt for an MRTA. Do note however that this mortgage insurance is not compulsory, so do not feel pressured to purchase the MRTA should your lender make it a requirement in order for you to qualify for a home loan. Make sure to check out other options available in the market.
2. What is MLTA?
Unlike the MRTA, the MLTA is not sold by the bank, instead, it is offered by a mortgage loan broker or insurance agent. MLTA offers repayment of your outstanding home loan as well as a guaranteed cash value back at the end of the scheme, similar to a life insurance policy. This cash benefit will help keep your family afloat in the event of your death or total permanent disability (TPD). Also, anyone can be a beneficiary for an MLTA – the policy-holder can nominate any family member to receive the pay-out should something happen to him or her.
MLTA has an insured coverage which remains constant or level throughout the policy’s tenure period -It is a complete protection package with additional savings and optional riders. The most important thing about this mortgage insurance is that the insurance proceeds are credit-proof and will not be frozen. In some cases, MLTA offers policy returns on premiums to fulfil your family’s financial necessity.
Upon paying off the bank for the outstanding mortgage amount, the insurance company will pay whatever money is leftover (plus returns on investment if the policy is investment-linked) in the form of a cash payout to the policy’s beneficiary. Most MLTAs provide the option of including a medical rider for critical illnesses too, providing further protection.
NOTE: MLTA is prized for its flexibility. You can co-own the mortgage insurance if you have jointly purchased a property with someone else, in which case the scheme will cover only 50% of your loan.
It is also easy to transfer the policy from one property to another, hence it is most sought after by property investors. Moreover, you can surrender this mortgage insurance policy at any time with a guaranteed surrendered value mentioned in your policy paper.
Where can you purchase MLTA?
Mostly, insurance companies offer MLTA as it is a hybrid of life mortgage insurance offering you both protection and savings.
3. How is MRTA and MLTA calculated in Malaysia?
Similar to any insurance product, the premiums for both MRTA and MLTA will depend on factors such as:
- Insured age
- The coverage amount (amount of loan insured)
- The loan tenure period
- Home loan interest rate
- Health risk factors
- Option to pay for the insurance via cash or factored into the home loan (for MRTA only)
MRTA is a lot cheaper than MLTA because the insured coverage reduces over time whereas for MLTA the insured amount remains the same over the housing loan tenure. It does not matter if you redeem the MLTA in the second year of your loan or in the 28th year – your beneficiary will still obtain the full coverage amount.
MRTA vs MLTA – Cost Comparison
Let’s take the example of an RM350,000 housing loan with the following details:
- The age of the borrower is 40 years old
- Loan tenure of 30 years, with 90% financing
- An interest rate of 5% (applicable for a property costing RM350,000)
The MRTA insurance policy only requires a one-time payment of RM18,841. An MLTA insurance policy, on the other hand, requires monthly payments of RM367 (RM4,404 per annum). Over the 30-year loan tenure, the premium payments will total RM132,120. That is more than 10 times more expensive than the MRTA.
4. Which mortgage insurance offers better protection?
Let’s take a look at the pros and downsides of both MRTA and MLTA to assist you with your decision-making:
Cons of MRTA
1) The MRTA’s biggest downside is that the loan settlement directly goes to the bank and your family will have no control whatsoever over it. Even if the loan is settled, your house can remain frozen under the state. This is until all your income tax, legal and accounting expenses are paid. You have to remember that since your family will receive no cash value from the policy, they will not be completely protected from the financial burden in your absence.
2) Those opting for MRTA coverage below the housing loan amount should take note that their MRTA coverage will be affected by fluctuations in interest rates. Should interest rates increase down the road, the housing loan outstanding balance will be higher than the sum insured. Hence, giving policyholders no choice but to pay the balance.
MRTA will be a better option if:
- you plan to keep the house for the long term and have no financial dependents.
- you are a young adult on a budget leash
- you already have your own medical insurance.
|Pros of MRTA
|Cons of MRTA
|Lower total cost of the premium. Only requires one lump sum payment.
|Only covers death and Total Permanent Disability [TPD]. There is no payout for critical illness.
|Can be bundled together with your housing loan to reduce additional cash expenses
|Sum insured decreases over time. And at the end of loan tenure, you will be left with zero cash value.
|Can be transferable but is a complicated process.
Cons of MLTA
1) The extra facilities of MLTA come at a price of a higher premium, which could cost up to 10X more than MRTA. However, the premium can be paid periodically over the tenure of the housing loan, on a monthly, quarterly or yearly basis.
2) You don’t need to buy an MLTA upon the purchase of your house, but if you were to buy it later, you will be paying more in the long run since its premium payments are repetitive. Age plays a role in MLTA much like life insurance, the higher your age, the higher your premium will be.
MLTA will be a better option for you if:
- you are the sole breadwinner of your family and have several dependents.
- you intend to keep the property for the short term or have plans to upgrade in the mid-term
- you are a property investor with a few rental properties – the MLTA is easily transferable and can be used to cover any one housing loan. Also, there is no need to transfer the policy from one bank to another when refinancing or selling off a property – Investors can easily use it for their next property.
|Pros of MLTA
|Cons of MLTA
|Protection remains the same even at the end of the tenure.
|Higher total premium cost.
|Cash value accumulation. Can be withdrawn at any time.
|Can easily transfer the protection to a new property purchase.
5. Tips when buying mortgage insurance
- Don’t fall prey to agents who try to throw MRTA in your housing loan package without justifying why you need it and are shady about interest rates.
- Find out whether legal loan fees and valuation fees are financed in your loan package.
- If you plan to sell the property within a few years, do not purchase mortgage insurance but if you intend to keep it for a long time or are co-purchasing it with someone else, then it is better to get the insurance.
- There is no need to purchase either insurance should you already have life insurance that covers the total amount of your loan and have no other pressing financial liability.
There is also the Takaful version of MRTA and MLTA, called Mortgage Reducing Term Takaful (MRTT) and Mortgage Level Term Takaful (MLTT). Read more about which takaful mortgage insurance is better, MRTT or MLTT.
6. Is it compulsory to buy MRTA or MLTA?
If we’re talking about the law, then mortgage insurance, be it MRTA or MLTA, isn’t something that is compulsory. Bank Negara Malaysia (BNM) does not require you to have one. However, financial institutions have their own set of conditions when it comes to approving a housing loan. It’s highly unlikely that you will be able to meet those requirements without signing up for mortgage insurance.Discover properties for sale
7. Can I transfer MRTA or MLTA to another property?
It is a common misconception that an MRTA is non-transferable from one property to another. This is a myth – all you have to do is to top up the premium based on the new property’s value. Say you plan to upgrade to a new home worth RM600,000 Property B and you currently have RM400,000 left in your current MRTA. You will have to top up for the remaining RM200,000 when transferring over your MRTA to Property B.
However, the process is a bit complicated and may consume a considerable amount of time if you intend to transfer the policy from one bank to another. Alternatively, you have the option to surrender the MRTA at any point in time and get back the surrender value, in cash as per your written policy terms. You can then purchase a new mortgage insurance for Property B.
MLTA, on the other hand, is the opposite. It is a policy which is not attached to any housing loan and you can take it with you to your next property purchase.
8. Can I change or convert MRTA to MLTA?
Yes, you can. First, you need to apply for the MRTA cancellation from the insurance company that issued it. There is no need to go to the bank as they only issue the loan and not the MRTA insurance.
Depending on your contract, you may get a pro-rate refund. You can then apply for an MLTA. However, some insurance agents will advise you to apply for the MLTA BEFORE you cancel the MRTA. There is usually a waiting period for approval of the MLTA and you risk your home being without any coverage if you cancel your MRTA first.
9. Is there another alternative to MRTA and MLTA?
If you would like to get a fusion of both options at a lower premium rate, then Term Life insurance is the answer. It is the oldest and most common life insurance which offers your family (beneficiary) a lump sum payment (sum assured) in event of your death or TDP during your policy tenure (similar to MLTA).
Meanwhile, the premium structure is akin to the MRTA but is more flexible as you and your loved ones will be protected as long as you pay the premium and it can be terminated at any point in time. Policy-holders can also extend the coverage by adding critical illness into the condition in return for a slightly higher premium.
There are 2 ways to incorporate Term Life insurance to meet your home loan dues. The cheaper plan is in the event of your death, where the lump sum money received by your family can be invested in return for regular interest income which can, in turn, be used to pay the loan instalments.
However, if you would like your family to have some extra cash after settling the outstanding loan, then your term life insurance coverage should be equal to your total living expenditure till your estimated retirement age (say 20 years) so that your family can pay the bills along with the mortgage in case something happens to you.
If you are looking for an affordable and more flexible option, with a transparent premium and coverage value, then Term Life insurance is for you.
Here are the properties you can find below 700K:
TOP ARTICLES JUST FOR YOU: