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It is time to pay an interest to decreasing term rates – Woollon

by: Andy Woollon, retail specialist at Zurich
  • 02/07/2021
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It is time to pay an interest to decreasing term rates – Woollon
As 2021 continues to see first-time buyers and home-movers compete in the ‘race for space’, existing borrowers are looking at remortgages and product-transfers to reduce mortgage costs, so it’s no wonder there’s a focus on interest rates.


With more fixed-rate longer term deals than ever before – for individuals and landlords – it’s no surprise that more than half of all remortgages and product transfers use five or 10-year fixed rate deals 

However, after more than a decade of low interest rates, why are decreasing mortgage policies still being quoted and set up on a default eight per cent interest rate and existing policies rarely reviewed?  

Whilst mortgage protection business is often transactional and written using a higher default rate to cover most eventualities, at best clients are paying for extra cover and at worst they are paying for cover they don’t need. 

A decreasing mortgage policy recognises that the mortgage will reduce over time, with the outstanding mortgage dependent on what interest rate is being paid.   

When a policy is set up, if the interest rate assumed is higher than that actually paid, the sum assured will be more than the outstanding mortgage. If the interest rate actually paid is higher than the assumed rate, the sum assured will be lower than the outstanding mortgage. 

Considering that by value, 98 per cent of all residential loans are advised and advisers are looking to develop ongoing relationships with clients, surely this should be part of the clients’ mortgage and protection review.  

After all, this may be the only time for the next five or 10 years you get to review your client’s mortgage-related protection needs. 


Offering flexibility

With clients far more switched on than a decade ago when it comes to reviewing bills, aligning the assumed rate used in their mortgage protection policy closer to their actual mortgage rate shouldn’t be a surprise to them. It may even be an expectation. 

Whilst product providers offer a range of interest rate options – varying from one per cent to 20 per cent, though thankfully those days are gone – in the main these are fixed at the outset and cannot be changed. 

We believe that a client’s policy and adviser should be for life and that’s why we provide the flexibility to decrease or increase the interest rate at any time during the term without underwriting, so it more closely reflects the actual mortgage rate being paid.   

Let’s look at some examples: 

  1. First-time buyers: 30-year £250,000 mortgage at 83 per cent loan to value (LTV), on a five-year fix at 3.1 per cent. Joint life decreasing term life assurance (DTA) at four per cent vs eight per cent over 30 years = £310 difference over term five, which could pay for waiver of premium instead. 
  1. Existing homeowners with kids: 20-year £200,000 remortgage or product transfer at 67 per cent LTV, on a five-year fix at 1.54 per cent. Joint life DTA with critical illness (CI) cover at two per cent vs eight per cent over 20 years = £2,515 difference over term five, excluding the difference during the first five years, which could pay for the addition of children’s CI benefit and multi-fracture cover instead. 
  1. Many buy-to-let landlords arranged five-year fixed rate mortgages in the run-up to the three per cent stamp duty land tax (SDLT) surcharge in April 2016, which are expiring and could prompt an increase in remortgage business. The same approach can apply if interest-only. 

It should be noted that the client is effectively swapping a higher sum assured for another benefit, providing choice and flexibility to tailor the policy to the client’s needs. 

As 2021 shapes up to be the year of remortgages and product-transfers, it should also be the year you review your client’s mortgage-related protection needs and interest rate used in their decreasing mortgage policies. 

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