“Wouldn’t it be great if you could insure your mortgage against a significant rise in interest rates?” asks Paul Farrow in The Daily Telegraph. Well, now you can, thanks to a new insurance product from MarketGuard. The policy is designed for anyone paying a standard variable or tracker rate, plus those who plan to do so once an existing fixed-rate deal terminates, provided the latter has less than three months remaining.
So, say I have a £150,000 variable rate repayment mortgage with 20 years left and have decided that I can afford an increase of 1.0% in both my mortgage interest rate and the Bank of England base rate (the “excess”), but would need insurance beyond that. A few clicks at Marketguard.com reveals that for £58 a month I can buy protection. Marketguard will cover my extra costs should rates rise beyond current levels, plus 1.0%. Had I chosen an excess of 1.5%, this drops to £37 per month and just £16 per month if I pick 2.5%. Sounds great – if my variable rate falls I pay my mortgage provider less and if it rises, my exposure is capped via Marketguard.
However, most people would be better off without it. For starters, it’s expensive to get the lowest 1% excess many nervous homeowners with big mortgages would want. Fifty-eight pounds per month is £1,392 over two years, which has to be paid up front for a full two-year term. And how many cash-strapped homeowners have that kind of money sitting around? And if you cancel you get nothing back, unless you act within the first 14 days, in which case you could lose up to an eye-watering 30% in “administration costs”. There’s also a question mark over how likely it is that your new policy will ever pay out.
Your premium only buys protection against a rate rise of, say, 1% or more if the rise occurs during the first two years, not the full term of your mortgage. Also should your mortgage lender increase their rate independently of the Bank of England – bear in mind that recently mortgage rates have tended to respond to changes in the London InterBank Offered Rate, rather than the base rate – the policy won’t pay out until both rates breach the excess level. Finally, if you are risk-averse and want peace of mind about your monthly outgoings, the simpler and (provided you shop around using sites such as Moneyfacts.co.uk) cheaper solution in many cases will be a fixed-rate mortgage.
As the FT’s Matthew Vincent notes, MarketGuard’s insurance may be attractive to those on cheap “lifetime” tracker deals or buy-to-let investors anxious not to give up a good existing deal but wanting a cap in case rates rise. And, “if you can afford the premium, you can probably afford to handle a few rate increases anyway”, says Farrow.