Protect Against Mortgage Rate Rises

A new insurance product has just been launched that gives homeowners the chance to protect themselves against rises in their mortgage payments. We run the numbers.

This week sees the launch of MarketGuard, an innovative new product that allows homeowners to insure themselves against rises in their monthly mortgage payments. It sounds like a godsend but closer inspection reveals that the protection it provides is really rather expensive.

As we know mortgage rates have been rising recently and many people are finding that when they come to the end of their current fixed-rate deal, any replacement offer they get is a lot more expensive. Worse still, some borrowers aren't able to get a new fixed rate at all.

What will happen to rates next is unclear. Although inflation is rising, the Bank of England risks damaging the economy if it raises the base rate to combat rising prices. However, there is a strong possibility we could see a rate rise in the near future.

Enter MarketGuard. It is a new company based in Gibraltar and is covered by the Financial Services Compensation Scheme. It first announced plans for its interest rate insurance back in March and it has been launched this week.

How it works

Essentially you agree to pay a monthly premium to protect yourself against a rise in your mortgage rate. So if your mortgage rate goes up, you should receive a payout from the insurance company to help you pay your mortgage. Like most insurance policies there is an excess so you only get compensation if your mortgage rises more than a certain amount.

For example, let's take a £100,000 repayment with 20 years left to run. A 1% excess will cost £42 a month, 1.5% costs £27 a month and so on. Cover for interest-only mortgages is more expensive at £57 for a 1% excess and £37 for 1.5%. This is because monthly payments for interest-only mortgages rise by a greater amount when your mortgage rate goes up.

You can get MarketGuard if you've got a variable or tracker rate mortgage or if you have a fixed-rate deal which is due to run out in the next three months. However, the policy doesn't cover you for any rise in your payments that result from your fixed-rate deal ending and your mortgage moving to a standard variable rate.

The policy also only covers interest rate rises that are directly caused by an increase in the base rate. We've seen a lot of mortgage companies increase their rates in isolation of base rate changes in recent months but you wouldn't be protected in these cases.

However, perhaps the most crucial clause in the policy is that is only runs for 2 years. After this time you can apply to have it renewed but having called the company's helpline, it appears that the interest rate will `reset' at this point and you'll only get protected for future interest rate rises from that point, and not ones you've suffered from in the previous 2 years.

Running the numbers

Let's use the same example of a £100,000 repayment mortgage with 20 years left to run. You're paying interest at 7% and the monthly repayments are £707. You opt for the 1% excess which costs you £42 a month for two years, which comes to a total of £1,008.

After one year let's assume your mortgage rate rises by 2% to 9% and remains at that level for the whole of the second year. An extreme example perhaps but it makes the calculations simpler. If you've got MarketGuard, your monthly payments will rise to £761 for the second year. Without its protection, you would pay £816 a month.

So you save £55 a month for a year, a total of £660. This is over £300 less the total of your premiums so you're actually worse off by taking out this cover. In fact, in this example, interest rates would have to rise by 2.5% or more for the second year in order for you to save money overall.

What's the verdict?

It's hard to get a fixed-rate mortgage at the moment. They are fewer deals available and many come with hefty arrangement fees that often have to be paid up front. Even against this backdrop, this looks like a very expensive alternative and the real killer is the short period it covers. Rates have to rise by a significant amount and near the start of the policy to make it worthwhile.

Many people have become unstuck by opting for 2-year fixed-rate mortgages in the first place. This policy looks another short-term solution to a long-term problem. If your monthly budget is tight now, it's likely to be tight in two years time as well so a fix for 3 or preferably 5 years would probably be a better solution. Even if you can't get a fixed rate at the moment, I'd be tempted to see if this product becomes more attractive. It's good to see innovation like this and at a lower price and for a longer period, it could become a viable solution. But right now, it's too pricey. 

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