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Thursday, January 15, 2009

Case Studies # 1: On Mortgage-Life versus MRTA ( Ini satu kisah benar )

Thomas bought a house back in Year 2002 for RM 300,000 and took a 90% mortgage on the house with a bank for 25 years tenure, i.e. RM 270,000 at an interest rate of 6.50% per annum, amortized and calculated on daily-rest basis with a monthly installment of RM 1,823 to be paid at the beginning of every month via auto-debit through a local bank.

He also took up a RM 13,500 single premium MRTA or the Mortgage Reducing Term Assurance for his Debt-Cancellation Plan on behalf of his Creditor, to satisfy his Creditor, as similarly required of all loan applicants by all the licensed lending institutions nowadays.

Note: The bank ( the lender ) is the Creditor while Thomas is the Debtor as far as the mortgage of RM 270,000 is concerned. Debtors are to satisfy the Creditors on the mortgage protection plan.

Unexpectedly and unfortunately, Thomas was diagnosed with end-stage kidney failure on the third year of his mortgage, i.e. Year 2005 and was unable to work during that distressing period. His income was not forthcoming and his little savings was not sufficient for any meaningful sustenance of whatever, not mentioning the cost of treatment for his pending kidney surgery then.

As expected, he eventually defaulted on his mortgage repayment and it turned NPL or Non-Performing Loan which empowered the bank to seize or re-possess his property for an auction ( fire-sale ) to recover the balance loan outstanding of approximately RM 255,000 at that moment, about after having about RM 51,000 in Interests Payable and RM 14,000 in Principal Payable. Note: Please refer to the Loan Repayment Schedule.

It is important to note that the Auction Price ( fire-sale ) of any given piece of property generally starts at two-third ( 2/3 ) of the Open Market Value, OMV and it only goes downwards from thereon every time the hammer is swung. That literally translates into an Auction Price of RM 200,000 for Thomas’ property which has a market value then of approximately RM 300,000 still. Most of us would not have thought of or even aware of this.

With the swing of a hammer at the auction house and just a little more than the time taken to sip a cup of coffee, his property was thus auctioned off by the bank at only RM 190,000 and sad enough, the story just doesn’t end there …

The bank promptly sent him a statement indicating that he now-and-still owes the bank for some RM 65,000 in outstanding loans despite already having his property seized from him. What an ordeal he wished had not!

Note: The auction (fire-sale ) price of mere RM 190,000 less off whatever his outstanding mortgage loan of approximately RM 255,000 at that time, thus giving a clean difference of RM 65,000 deemed `still outstanding’ to the bank ( the Lender, the Creditor ).

As the MRTA covers his debt only in the event of death & death only, it doesn’t help at all in this scenario, forcing him to reluctantly resort to public donations via the newspapers as well as through various other means that eventually raised some RM 100,000 for his surgery.

His dignity was at an all time low. Surviving the ordeal dominated his thoughts for most part of this very distressing period and he recalled and regretted his ignorance on the importance of the Critical Illnesses coverage provided for in the Mortgage-Life Insurance policy as he re-assesses his financial situation. He felt so stupid and has only himself to be blamed.

The bank didn’t give him a break though. They have already devised a plan in which he is to service a proposed personal loan on whatever the outstanding amount he still owes to the bank, i.e. the RM 65,000 at a very special rate of 6.50% per annum to him, amortized just like his earlier mortgage thereafter the auction exercise.

The really good news was: he underwent a very successful surgery and survived the ordeal as a healthy man again. He even got his job back as his employer appreciated him then and still does. He felt so welcomed and relieved to be ‘normal’ and back on his feet again.

He recently bought another similar house and had a similar arrangement pertaining to his mortgage but this time, he consciously bought a Mortgage-Life Insurance Policy for his Debt-Cancellation Plan instead of the rather helpless MRTA.


However, let’s examine the painful cost to Thomas for not doing it right the first time.

1. The 10% down payment made for the first house, RM 30,000
2. The Interest Paid for the first three years, approx. RM 51,400
3. The total installment on his personal loan, RM 76,300
4. The hidden costs like the legal fees & stamp duties, RM 3,700
5. Payment on the Memorandum of Transfer, MOT of RM 5,000
6. The cost of that helpless MRTA, at 5% of his loan, RM 13,500
7. The cost of that operations on his kidney failure, RM 100,000

8. Lost of dignity and possibly more … surely beyond just RM 279,900


* Has this true story given you a fresh perspective to your evaluation and analysis?

Note: It certainly costs Thomas some money to buy the Mortgage-Life. As we can see, it costs Thomas even much more for NOT buying Mortgage-Life! The cost of premiums paid for the Mortgage-Life Insurance Policy with Critical Illnesses Coverage for the entire loan tenure of 25-years do not even amount to a fraction of that! It even has Cash Values and also allows you to transfer it from bank to bank in the event of re-financing. Can we afford to ignore that? Can we afford not doing it right the first time? You may want to think about that again …

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