MRTT vs MLTT: Which takaful insurance is better?

Let’s take a quick look at the Takaful insurance products in Malaysia – MRTT and MLTT. We go over their respective pros and cons, the cost of each mortgage insurance as well as other important information for homebuyers in Malaysia.

Purchasing a property is a big financial commitment especially if you are a first-time homebuyer. Often, you will be opting for a housing loan offered by a financial institution and this also means that you will be committing yourself to a loan, which you have to pay off for the next 30 years or so. But did you know that such housing loans often come with a mortgage life insurance application as well? 

What is mortgage insurance and do you need one? 

Mortgage insurance provides coverage for your outstanding mortgage loan in the event of death or total permanent disability (TPD). In other words, it is a safety mechanism that is designed to provide financial support when you are not able to work to pay for the housing loan. Having a policy that covers your long-term loan will give peace of mind for you and your dependents –  at the very least that they will still have a roof over their heads!

Without insurance coverage, the housing loan lender or usually a bank in this case will have the right to repossess your property and auction it off if there is a failure in servicing the remaining balance on the loan.  

However, with mortgage insurance, you or your dependent/beneficiary will be able to continue to stay in the property as the insurance will cover the amount of the remaining housing loan, either by way of direct payment to the bank or by giving out a total sum to the beneficiary – depending on which life insurance product you have purchased.

1. What is MRTT? 

Mortgage Reducing Term Takaful or MRTT in short is a Takaful insurance product that gets you covered if you as a borrower or a homebuyer suffer from total permanent disability (TPD) or face death. In such an event, the lending bank will be paid in full for the loan settlement by the insurance company. MRTT insurance will then provide financial stability for your loved ones without giving any extra financial burden at such a difficult time.

The sum assured under an MRTT is designed to reduce as the total value of your outstanding loan reduces. This means the amount owed to the bank will decrease as you pay down your housing loan. Thus, it is essential that you ensure the insurance term and sum assured are properly established before the MRTT insurance policy commences.

Take note that an MRTT insurance policy will be cancelled if a homebuyer decides to refinance the property before the end of the coverage term. The latter will not be affected by the property refinancing or if the property buyer decides to sell the property. 

2. What is MLTT? 

Mortgage Level Term Takaful, aptly known as MLTT, is also an Islamic finance product that works to provide financial support to homebuyers if death or TPD occurs. It is a life insurance cover and the total amount assured will remain level throughout the duration of the policy. In terms of MRTT vs MLTT, an apparent difference is the pay-out method. 

MLTT will directly pay out the assured sum to the policy owner or beneficiary if death or TPD occurs. In such an event, it becomes the responsibility of the beneficiary to pay for the mortgage loan settlement with the financial institution and this can be done via instalments or lump sum payment, as per the arrangement agreed by both parties. 

If there is a surplus or additional amount left after the mortgage loan settlement, the beneficiary will be entitled to receive the money and it is the beneficiary’s right to access the funds.  This added advantage is why the MLTT is much more expensive than the MRTT.

MLTT will also not be affected by any property refinancing or if the home buyer decides to sell off the property at any point of time.

3. How much does it cost to buy MRTT and MLTT?

As the Takaful insurance policy is based on the total amount of a housing loan offered by the financial institution, there is no set cost for a MRTT or MLTT insurance policy. Similar to any insurance product, the premiums for both MRTT and MLTT 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 MRTT only)

A lump sum payment is required at the start of the MRTT policy. Many homebuyers top up this amount to their mortgage value because when the MRTT is included in the loan tenure and payment plan, the lending bank will typically provide a lower interest rate to the borrower. MRTT is said to be a relatively cheaper option compared to a level-term policy such as MLTT.

MLTT is usually more expensive because the financial risk covered by the financial institution is usually greater as it requires the same amount of pay-out at any time of the policy. Also, the costs will generally be higher when the borrower is older or if he is opting for a longer coverage term. The cost will also increase when the borrower requests a higher insured value for the property.

READ: Perfection of Transfer and Perfection of Charge: Everything property buyers need to know

MRTA vs MLTA – Cost Comparison

Let’s take the example of a 35-year-old male with a home loan of RM250,000 for a period of 35 years. This example also takes into consideration that the MRTT is bundled in as part of the housing loan.

	Cost of MRTT in short term	Cost of MLTT in short term
Original housing loan amount	RM250,000	RM250,000
Housing Loan period	35 years	35 years
Total Takaful premium (35 years)	RM14,470	RM81,589.20
Loan amount with Takaful protection	RM264,470 (RM250,00 + lump sum RM14,470 MRTT payment)	RM250,000
Monthly loan instalment (3.25%)	RM1,055.00	RM997.34
Monthly Takaful payment	RM57.66 (included as part of housing loan)	RM194.26
Total monthly instalment (loan + Takaful)	RM1,055.00	RM1,191.60

If you look at the total premiums and monthly instalments, then MRTT is clearly the cheaper option. However, this is only in the short term. We also have to take into account that MLTT offers a guaranteed cash value back at the end of the scheme, similar to a life insurance policy. Below is a comparison of MRTT vs MLTT in the long term:

	Cost of MRTT in long term	Cost of MLTT in long term
Takaful payments over 35 years	– One lump sump payment of RM14,470 (part of the total loan amount) – Monthly payments of RM57.66 x 35 years = RM24,217.2	Monthly payments of RM194.26 x 35 years = RM81,589.20
Cash value back after 35 years	None	RM64,087
Long-term cost after 35 years	RM38,687.2 (RM14,470 + RM25,995.40)	RM17,502.20 (RM81,589.20 – RM64,087)

Therefore, in most scenarios, the MLTT provided better value for money in the long term.

4. Is it compulsory to buy MRTT or MLTT? 

Legally, it is not compelled by the law, but this has often become a necessary item to tick to obtain a housing loan in Malaysia. In a way, many financial institutions such as banks made it mandatory to have such mortgage life insurance to provide assurance for the loan offered to the property buyer. 

5. Is Takaful home loan insurance, MRTT or MLTT better than MRTA or MLTA?

As discussed above, MRTT and MLTT are both Islamic financial products and they are simply the Takaful version of both Mortgage Reducing Term Assurance (MRTA) and Mortgage Level Term Assurance (MLTA).

Like MRTT, an MRTA insurance policy is the conventional product of MRTT, covering a reduced housing loan over a period of the agreed term. The same goes for MLTA. It is the conventional version of its Takaful version – MLTT. Equally, all these are mortgage life insurance products, and they offer coverage in the case of death or TPD.

Islamic finance as a whole is a growing global industry and Malaysia is one of its pioneers. An unlike what some people assume, it is available to non-Muslim customers as well. Takaful home loan insurance, like any other Islamic finance product, adheres to Islamic (Shariah laws) and avoids any elements of riba (interest), gharar (uncertainty), maysir (acquisition of wealth by chance), and zulm (immoral and unethical business or practices).

Both MRTT and MLTT use a concept where a Takaful operator manages a collective fund where each participant contributes a certain amount of donation (tabarru) and mutually guarantees each other against loss or damage.

MRTT/MLTT vs MRTA/MLTA

In terms of benefits, here are reasons how MRTT and MLTT (Takaful) are better than conventional insurance counterparts (MRTA and MLTA):

You get a profit, instead of a bonus

In conventional insurance, any extra money or profit belongs to the shareholders of the insurance companies. For Takaful protection, all participants and shareholders share profits from investments.

Free from riba

The goal of conventional insurance companies is to collect premiums under owned accounts to achieve profits. By comparison, Takaful aims to achieve cooperation among its participants.

Cashbacks

 For certain Takaful products, there is a certain amount of cashback if you do not have any claims to make during the coverage period.

Good deeds

One of the major underlying concepts of Takaful is mutual cooperation. A pooled fund is collectively contributed by a group of people under takaful coverage and it provides mutual financial aid.

Hibah

Takaful protection allows a participant to nominate a person to receive a Hibah if the person does not want the Takaful benefits to be distributed as part of their estate.

CHECK OUT: A beginner’s guide to Islamic home financing in Malaysia

6. Can I change or convert MRTT to MLTT?

Yes, you can. First, you need to apply for the MRTT 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 MRTT insurance.

Depending on your contract, you may get a pro-rate refund. You can then apply for an MLTT. However, some agents will advise you to apply for the MLTT BEFORE you cancel the MRTT. There is usually a waiting period for approval of the MLTT and you risk your home being without any coverage if you cancel your MRTT first.

Do note that changing from MRTT to MLTT does not change your monthly loan repayment as it is a separate matter.

7. How is MRTT and MLTT related to hibah?

Hibah is a feature of Takaful which has a literal meaning of gift or legacy. As both MRTT and MLTT are a type of Takaful protection, they allow a participant to nominate a person to receive a Hibah if the person does not want the Takaful benefits to be distributed as part of their estate.

Hibah should not be confused with two other common Islamic practices — faraid and wasiat. The beneficiaries for the former are eligible heirs while for the latter, the beneficiaries are anyone other than heirs. For hibah, anyone can be nominated as a beneficiary. There are of course plenty of other differences between the three.

8. Pros and cons of MRTT

The pros and cons of MRTT protection can be summarized below:

Pros of MRTT	Cons of MRTT
Can be bundled together with your housing loan to reduce additional cash expenses.	– Only covers death and Total Permanent Disability [TPD]. – There is no payout for critical illness.
-In the short term, it has a lower total cost – Only requires one lump sum payment. – If it is bundled together with the housing loan, the monthly repayment is generally lower.	Over the long term, the overall costs can be higher if bundled together with the housing loan.
	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.

Therefore, MRTT 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

9. Pros and cons of MLTT

On the other hand, the pros and cons of MLTT are as the following:

Pros of MLTT	Cons of MLTT
Protection remains the same even at the end of the tenure.	Higher cost if viewed in terms of total premium paid or monthly instalments.
– Cash value accumulation. – Can be withdrawn at any time.
Over the long-term, the total costs can be lower, when taking into account the cash value accumulation.
Can easily transfer the protection to a new property purchase.

Therefore, 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.

Always remember that both MRTT and MLTT are offered by many financial institutions – banks or insurance companies – and they vary accordingly in their terms and conditions, including spelling out the basic definition of TPD! Consider carefully the offer made to you including the mortgage insurance cost, the duration of the coverage and other factors, depending on your current circumstances. 

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