The short answer
Decreasing cover is built to fall alongside a repayment mortgage, and it costs less than level cover because the insurer is on the hook for less as time goes on. For most people with a repayment mortgage, it does the job.
What it does not do is track your actual mortgage. It falls on its own schedule, fixed on the day you take it out, and your mortgage carries on doing whatever your mortgage does.
For as long as those two things stay in step, everything is fine. The tables below show what happens when they stop, and the honest finding is that the interest rate mechanic everyone worries about is the least of it. What actually leaves people short is changing the mortgage after the policy is already running.
How a repayment mortgage balance actually falls
Not in a straight line, which surprises people.
In the early years almost all of your payment is interest, so the balance barely moves. It picks up speed later, and most of the capital comes off in the back half of the term.
Take a £250,000 repayment mortgage over 25 years at 4.5%. All the figures on this page are illustrative and use that mortgage throughout, so you can follow the same arithmetic with your own numbers.
After five years of payments, you still owe £219,645. You have been paying for a fifth of the term and cleared about an eighth of the debt.
By year 15 it is down to £134,080. By year 20, £74,536. The last third of the term does most of the work.
How decreasing cover falls, and the rate nobody explains properly
Decreasing cover falls the same way, on the same kind of schedule. The catch is that the insurer does not use your mortgage rate. It uses an assumed rate, set when the policy starts and printed in your key features document.
That single number decides how fast your cover drops. It is worth finding yours, because almost nothing written about this online tells you what it does, and the answer is not what most people assume.
The examples below use 8% as the assumed rate. That is purely to illustrate the mechanic. Look up your own, because yours will be different.
Year by year, all three lines together
Same £250,000, same 25 years. Mortgage at 4.5%, decreasing cover on an 8% assumed rate, level cover for comparison.
| Year | Mortgage owed | Decreasing cover | Level cover | Decreasing vs mortgage |
|---|---|---|---|---|
| 0 | £250,000 | £250,000 | £250,000 | level |
| 5 | £219,645 | £230,685 | £250,000 | £11,040 over |
| 10 | £181,646 | £201,908 | £250,000 | £20,262 over |
| 15 | £134,080 | £159,036 | £250,000 | £24,956 over |
| 20 | £74,536 | £95,162 | £250,000 | £20,626 over |
| 25 | £0 | £0 | £250,000 | both end |
Illustrative figures. Your own cover, mortgage balance and premiums will differ.
The surprise: a higher assumed rate is safer, not riskier
Look at that last column again. The decreasing cover is above the mortgage the whole way through, and by year 15 it is nearly £25,000 above it.
That is the opposite of what most articles imply, and the reason is worth understanding, because it takes about a minute and it will save you worrying about the wrong thing.
A loan at a higher interest rate pays its capital down more slowly in the early years, because more of each payment goes on interest. So a cover schedule built on an 8% assumption falls more slowly than a mortgage running at 4.5%. The cover stays ahead.
Which means the assumed rate being higher than your mortgage rate is not a problem. It is a cushion.
The genuine risk is the other way round. If your mortgage rate ends up above the assumed rate on your policy, your balance falls more slowly than your cover and a gap opens. On the same £250,000, with cover assumed at 6% and a mortgage actually running at 8%, the shortfall peaks at £14,048 around year 16.
That is a real gap and worth knowing about. It is also, in the scheme of things, not enormous. Which brings us to the one that is.
What actually goes wrong: you change the mortgage
Your policy schedule was fixed on the day you signed. Your mortgage was not.
Say you take the cover with a 25 year mortgage, and five years in you remortgage. Your balance is £219,645 and the new lender spreads it over a fresh 30 year term, which is a very ordinary thing to do because it brings the monthly payment down.
Your cover has no idea any of this happened. It carries on falling on its original schedule.
| Year | Mortgage owed | Decreasing cover | Position |
|---|---|---|---|
| 10 | £200,224 | £201,908 | £1,685 over |
| 15 | £175,912 | £159,036 | £16,877 short |
| 20 | £145,479 | £95,162 | £50,317 short |
| 25 | £107,384 | £0 | cover has ended |
By year 20 the cover is £50,317 short. By year 25 the policy has finished entirely and there is still £107,384 outstanding with five years left to run.
Nothing went wrong with the policy. It did exactly what it was sold to do. The mortgage moved and the cover could not follow.
This is the thing to watch, and it is the reason it is worth a five minute conversation every time you remortgage, move, extend a term or borrow more for an extension. Sorting it at the time is straightforward. Discovering it twenty years later is not.
The change that works in your favour
Two tables of things going wrong is enough. Here is the one that goes right, because almost nobody mentions it.
Overpaying your mortgage does the opposite of extending the term. Your balance falls faster while the cover carries on down its original schedule, so the gap between them widens in your favour.
On the same £250,000 at 4.5%, the normal monthly payment is about £1,390. Add £200 a month to it and the mortgage clears in a little under twenty years instead of twenty five.
| Year | Balance after overpaying | Decreasing cover | Surplus |
|---|---|---|---|
| 5 | £206,216 | £230,685 | £24,469 |
| 10 | £151,407 | £201,908 | £50,502 |
| 15 | £82,797 | £159,036 | £76,239 |
| 20 | £0 | £95,162 | £95,162 |
Illustrative figures, same assumptions as above.
Compare year 15 with the first table. Without overpayments the cover sits about £25,000 above the balance. With them it is more than £76,000 above.
By year 20 the mortgage is gone entirely and there is still £95,162 of cover running. That money is no longer mortgage protection. It is family protection, and it arrived without you buying anything extra.
Nobody overpays a mortgage for the insurance benefit. It is just a pleasant side effect that never seems to get mentioned.
Interest only, shown rather than stated
Every guide tells you decreasing cover is wrong for an interest only mortgage. Very few show you what that actually means.
On interest only, the balance does not move. You owe £250,000 in year one and you owe £250,000 in year twenty.
| Year | Mortgage owed | Decreasing cover | Shortfall |
|---|---|---|---|
| 5 | £250,000 | £230,685 | £19,315 |
| 10 | £250,000 | £201,908 | £48,092 |
| 15 | £250,000 | £159,036 | £90,964 |
| 20 | £250,000 | £95,162 | £154,838 |
The gap widens every single year, and by year 20 the cover pays less than 40% of the debt. Level cover is the right shape here, and part and part mortgages sit somewhere in between, which is worth working out properly rather than guessing at.
You already have a mismatch. Now what?
Most people reading this have a policy already, and have just done some uncomfortable arithmetic. It is a fixable problem and it is worth knowing the options before you do anything hasty.
Do not cancel anything first. This is the one genuine mistake to avoid. If you cancel the old policy before the new cover is agreed and in force, you are uninsured in between, and you are re-applying at your current age with your current health rather than the age and health you had when you first took it out. Both of those only move one way. Whatever you end up doing, the old policy stays live until the new one is confirmed.
Topping up is usually cheaper than replacing. If your cover is £50,000 short in the middle years, a small second policy covering the gap is often less than starting again with one large replacement. Your original policy keeps the terms and the price it was written at.
Some policies can be increased without new medical questions. A guaranteed insurability option, if your policy has one, lets you increase cover after certain life events, commonly a house move, a new mortgage, a marriage or a new baby, without going through underwriting again. It is not on every policy and it usually has a time limit after the event. Worth checking your policy documents for, because it is the cheapest fix available if you have it.
Sometimes doing nothing is right. A gap in years 15 to 20 on a policy you may well have replaced by then is a different problem from a gap that starts next year. Size it, then decide.
Which of those applies depends on your policy wording, your health now, and how big the gap actually is. It is a fifteen minute conversation and it does not cost anything.
Your mortgage is not your family’s only bill
Worth stepping back from the arithmetic for a moment, because there is a bigger point hiding behind all of it.
None of these policies is attached to your mortgage. The money goes to whoever you have named, and they can do what they like with it. Clearing the mortgage is usually the first thing anybody does with it, but nobody is obliged to.
So the real question is not which of two products to buy. It is how much money should land, and whether a mortgage shaped payout is enough for a household that has also lost an income and gained a childcare bill. Our guide on how much cover you actually need works that through properly.
Most families end up with two policies rather than one. Decreasing cover sized to the mortgage, level cover sized to the family, running until the children are independent. Because the decreasing half is cheaper, the two together usually cost less than one large level policy covering everything.
When decreasing is genuinely the right call
Quite often, and it is worth saying plainly after four tables of things going wrong.
If you are on a repayment mortgage, you expect to see the term out, and the cover is there to clear the debt, decreasing cover is doing exactly what it was designed for and it costs less than the alternative. The tables above show it sitting comfortably ahead of the balance for the whole term.
It is a good product. It just has one assumption baked into it, which is that the mortgage stays roughly as it was when you bought it.
Five questions before you choose
- Is your mortgage repayment or interest only? If any part of it is interest only, decreasing cover is the wrong shape for that part.
- What assumed rate is on your policy, and how does it compare with the rate you are actually paying? Higher is a cushion. Lower is a gap.
- Is your cover term at least as long as your mortgage term? If the mortgage outlives the policy, the last years are uncovered.
- Are you likely to extend the term or borrow more? If so, plan to revisit the cover at the same time.
- Is the mortgage the only thing you would want the money to cover? For most families with children, it is not.
None of that needs working out on your own. It is the sort of thing an adviser can run through in one conversation, and it costs nothing to ask.
Questions we get asked
How we worked this out
All figures on this page are illustrative and calculated from a standard repayment schedule. The mortgage is £250,000 over 25 years at 4.5%. Decreasing cover follows a repayment schedule on the same amount and term at the assumed rate named in each section, 8% unless stated otherwise. The remortgage example re-spreads the year five balance of £219,645 over a fresh 30 year term at the same rate. Your own policy, mortgage and premiums will differ, and the assumed rate on your cover is in your key features document.