Mortgages: Borrowers offered rate rise protection

Mortgages: Borrowers offered rate rise protection

The MarketGuard interest rate insurance policy offers protection against rises in the Bank of England base rate to anyone on, or switching to, a standard variable rate or tracker mortgage.

The policyholder chooses an insured rate - either 1%, 1.5%, 2% or 2.5% above the Bank of England's interest rate and the policyholder's mortgage rate at the time.

If both of these rise by more than the chosen rate the insurance will start paying out, giving the policyholder cash to help meet the higher mortgage repayments.

Someone with 20 years left on a £150,000 mortgage who wanted to insure themselves against a rise in the bank base rate of more than 1% would pay £62 a month on a repayment mortgage, or £85 a month on an interest-only deal.

To insure against a 2% rise the same mortgage holder would pay £26 a month on a repayment deal, or £35 a month on an interest-only deal.

However, the policy only runs for two years at a time and premiums have to be paid upfront, so a homeowner insuring a £150,000 repayment deal against a 1% rate rise would have to stump up £1,488.

If the policy is cancelled at any stage during the two years, 30% of the total cost of the policy is held back as a fee.

The policy pay-out will match as "closely as possible" the rise in the borrower's.....continued below

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Chris Taylor, the chief executive of Marketguard, expects uptake to come largely from homeowners and buy-to-let landlords who have no way of remortgaging because lenders are withdrawing products and tightening their lending criteria.

"However, this product is aimed at anyone who for whatever reason does not want to take a fixed rate," he said.

"There are a host of reasons now, often based on cost, that people are turning away or are being turned away from fixed deals."

Extra costs

Over the past 10 years the base rate has risen a total of 19 times, an average of less than two rises a year, but Marketguard predicts at least three further rises in the next year.

"Our research reveals that even the slightest increase in the Bank of England's interest rate could tip people over the edge," said Taylor.

Melanie Bien, director of independent mortgage broker Savills Private Finance, agreed the insurance would appeal to borrowers, but said there were downsides to the policy.

"It doesn't pay out until interest rates have risen by more than 1% above base rate (depending on the excess you opt for) so anything less than this and you have to pay the extra costs yourself," she warned.

"If you have a £150,000 interest-only mortgage with 20 years left to run, for example, you could therefore find yourself with an annual premium of £1,020 but still having to cover the cost of the first four quarter-point rate rises yourself."