Pru deal asks questions of clients and advisers

Prudential has finally set the long awaited interest rate for its life-time mortage. The montly rate of 6.45% – annual equivalent 6.64% – sets the standard as the lowest draw- down interest rate available.

It is encouraging to see Pru has heeded calls for more competitiveness in the drawdown sector to narrow the cost gap between these schemes and standard fixed rate lifetime mortgages. And it is this that many IFAs and brokers are struggling to analyse effectively.

With drawdown, clients can be split into two camps – those who have an idea of when and how much they will drawdown and those who want the facility to take further funds but do not know when, if at all, they will exercise the option. The first, with the appropriate tools, can be compared to taking all the funds at outset with a lower fixed rate provider. Reasonable comparisons can then be drawn.

The problem is with comparisons for clients who fall into the second camp – those who do not know how much they want or when and who may never use the facility.

Knowing that funds will be available throughout the life of the loan is what differentiates The Pru’s product. But it is important to remember that the facility is only available while the Bank of England base rate is below 10%. The facility for the client who doesn’t know what they may want in the future but wants the security of the ongoing provision becomes a priority that might override the lowest cost option being recommended.

The table below shows an initial advance of 30,000 using the 6.45% rate against the current lowest rate of 6.15% annualised from Portman.

The difference in cost over time is sufficient that the client should be aware of the cost of the facility over the years. This will lead to one of two outcomes – accept the cost or rely on the availability of further advances from a lender currently charging a lower rate of interest.

This issue of an open-ended drawdown facility – all but guaranteed, base rate permitting – is one that has not bee investigated and debated with clients before in the way this product now requires. Will clients be prepared to pay for the privilege? Only once the product is launched will we find out.

The positive message is that this product provides an open-ended facility.

In addition to this, it is setting new standards for interest rates for drawdown and the importance of this cannot be overstated. Any reduction in the cost of these facilities is great news for consumers and advisers.

The obvious market for the product is for those clients who have an idea of how and when they will use the facility. Following the appropriate analysis this product may well provide the lowest cost solution for them.

It will be interesting to see how the other drawndown providers react to the pricing of The Pru’s product as, given the popularity of these products, rate coupled with a more flexible facility may well be the way ahead for this market in the longer term.