Getting a mortgage can be one of the most stressful things a person will have to face in their financial lives. When it comes to protecting that mortgage against death or critical illness it is vital that a plan is put in place that will fully cover the outstanding liability and is future proofed against possible interest rate rises. Many mortgage borrowers have only ever known low interest rates; however, it is dangerous to assume mortgage rates will remain as low as they have been for the last decade. Mortgage rates peaked at 15.4% in the early 90s and were even higher, 17%, early in the previous decade. This week we look at the different interest rate options insurers offer within their mortgage protection plans and who offers the most flexibility.

Where life protection is implemented to cover the client’s liability it is important that the interest rate during the term of the plan can mirror the interest rate of the mortgage. If the rate is higher the client could potentially be overpaying, if the rate is lower the client is at risk at not being fully covered on their mortgage in the event of a claim.

When getting quotes via a protection portal, advisers can usually select the interest rate they wish to insure up to, if however, an insurer does not offer that option the systems will usually default to a standard rate or the closest that insurer will offer.

All providers that offer Mortgage Protection offer a range of interest rate options that can be selected in line with the client’s mortgage requirements.

Starting from 5% and reaching a maximum of 20% for any provider, the table below confirms the interest rate options that are available:

Provider/Plan
Interest rate options available
AEGON
8%
AIG
5%, 6%, 7%, 8%, 10%, 11%, 13%, 15%
Aviva
5%, 6%, 7%, 8%, 9% 10%, 11%, 12%, 13%, 14%, 15%
Canada Life
5%, 6%, 7%, 8%
Guardian
5%, 6%, 7%, 8%, 9% 10%, 11%, 12%, 13%, 14%, 15%, 16%, 17%, 18%, 19%, 20%
Legal & General
5%, 7%, 8%, 10%
LV=
6%, 7%, 8%, 9% 10%, 11%, 12%
Royal London
0%, 1%, 2%, 3%, 4%, 5%, 6%, 7%, 8%, 9% 10%, 11%, 12%, 13%, 14%, 15%
Scottish Widows
5%, 6%, 7%, 8%, 9% 10%, 11%, 12%, 13%, 14%, 15%, 16%, 17%, 18%, 19%, 20%
Vitality Mortgage Plan
10%
Zurich
2%, 4%, 6%, 10%, 12%, 14%, 16%, 18%

The greater range of interest rate options available from a provider means that there is more potential for a firm to be able to recommend a plan in line with their assessment of where interest rates might go in the future.

Royal London and Guardian look to take their offerings further by providing a ‘Mortgage Guarantee’. Guardian has automatically included this with their decreasing cover while Royal London offers it as an additional feature within in their Personal Menu Plan.

The Mortgage Guarantee is a unique feature which is acts as a safety net within a Decreasing Mortgage Protection plan. It guarantees to pay out the value of the mortgage outstanding at the time of the claim, as long as the amount and term is the same as when the policy started and it isn’t in arrears at the time of claim.

Naturally, it is best practice to ensure that the interest rate attached to the decreasing cover mirrors the protection policy from the start and throughout the term. However, if for any reason the mortgage liability is greater than the cover in place due to high interest rates (at time of claim), then this can be a great lifeline for the client and remove a potentially very stressful issue if it ever arose. 

Although not a mortgage guarantee, Zurich enable the policy holder to change the interest rate applicable to the policy at any time. This will also provide a safety blanket in the event that the mortgage interest rate exceed the interest rate applied to the policy, however unlike a mortgage guarantee this requires the policy holder to contact Zurich to change the interest rate on the plan and may lead to an increase in the premium. 

Overall, Guardian and Royal London stand out from the other providers, as they are the only two providers who offer the Mortgage Guarantee feature, which acts as a safety net for clients. While Scottish Widows should also be recognised as being the only provider alongside Guardian who offer the full range of interest rate options starting from 5% all the way up to 20%.