Mortgage payments have come down as a result of reducing interest rates. Should my mortgage IP clients be looking to reduce their benefits?
Where income protection (IP) has been taken out to protect earnings, rather than specific expenditure, it would be unwise to make adjustments to the cover solely due to movements in the interest rate. However, where IP has been taken out to cover the mortgage payments some people may find themselves with surplus cover because their mortgage payments have reduced.
For a typical mortgage of £100,000 over 25 years a 1% reduction in the interest rate represents between a £50-£60 per month reduction in the mortgage payment. So the payment for such a loan could have reduced by over £100 per month over recent times. However, as IP is not designed to track changes in the interest rate, when it is utilised as mortgage protection the level of cover chosen is usually in excess of the exact mortgage payment. This is to allow some prudence for increases in interest rates, or to cover associated costs, such as household insurance.
An IP policy taken out a year or two ago to protect a mortgage would probably have a benefit of at least £800 per month, as the mortgage payment at that time would have been in excess of £700 per month. That payment is now likely to be around £600 per month, so there is more prudence in the level of IP cover than originally intended.
However, few would bet against interest rates rising in the future, so except where someone has a short mortgage term remaining, it would be unwise for them to reduce their IP cover, unless their policy has an increase option built into it. This is because if they subsequently needed to increase their cover this would be subject to underwriting and possibly a minimum charge.
