Should you insure mortgage against rate rises?

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Traditionally if you thought rates were going to rise - or you couldn't afford any risk that they would - you'd quickly remortgage onto a fixed rate, and your worries would be over. Now, however, changes in mortgage rules, a drop in the value of their home or difficulties with their own circumstances mean that many cannot qualify for a new mortgage, so are stuck on whatever deal they had in the good times.

However, they do still have one other option.

Insurance

A relative newcomer to the market is an insurance product, which lets you insure against a rate rise. The idea is that in return for a premium, you set a cap, which can either be your current rate or you can factor in a rise of either 0.5% or 1%. This rate can be capped for either two or three years. If rates rise above the cap in this time, the insurance product will pay the difference.
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The captive audience

The number of people trapped in their mortgage has gone through the roof. The Council of Mortgage lenders say that 830,000 are in negative equity, which is a drop in the ocean compared to those who cannot remortgage for other reasons.


The product will also appeal to those who secured an incredibly low variable rate before the market crashed. It is though that there are around 700,000 borrowers on Nationwide's 2.5% 'Basic Mortgage Rate' deal, for example, which promises never to be more than 2% above the base rate. They won't want to take the massive hit involved in switching to a fixed rate, but they may not be prepared for a rate rise either.

Is it worth it?

There may be savings for some people. The Rateguard calculator reckons that for someone with 15 years left on their £100,000 repayment mortgage, and an interest rate of 2.75%, they would be £2,491 better off with an insurance policy than if they switched to a three year fix at 4% with fees of £1,500.

Of course there are a few catches. The rate rise has to come after a Bank of England rate rise or a rise in the three-month Libor rate, and can't just be an adjustment of the SVR on the whim of the lender who wants to make money.

In addition, the experts highlight that you don't always face big fees for switching to a fix, and if you're on a bad deal now, a fix may not be that much more expensive, so it's worth considering the specifics of your deal.

Then there's the fact that you have to set the cap. If you go for a 1% cap, you may well see the cost of your mortgage increase with smaller rises, with no payout from your insurance. If you go for a cap at your current rate, you will pay handsomely for it. If, for example, your current mortgage rate is 5% and you want to ensure you don't pay any more for two years, you'll pay total premiums of £1,412 for the security.

There's also the question of whether you are happy with a product that offers security for three years, or would prefer a five year fixed rate mortgage.

Of course if you are a mortgage prisoner who is desperately worried about a possible rate rise, then you may consider it is worth it.

Will rates rise?

And finally there's the issue of whether interest rates are going to rise at all. There are never any guarantees when it comes to the predictions, but there are plenty of people who think rate rises won't come from a good while to come - including The Centre for Economic and Business Research - which predicts change in 2016 - and Capital Economics - which expects it in 2015.

Others have been calling a rise a bit earlier. UBS predicts the first rise to come next year, while Experian hasn't ruled out a rise by the end of this year. A raft of experts have suggested a rise in 2014, including ING, Commerzbank, and the National Institute of Economic and Social Research.

As ever, there are no guarantees about future rates, and no guarantees that what you do will be the right thing, you just have to weigh up all the options, consider the scenarios that worry you the most, and make your own decision.

But what do you think? Do you like the sound of this product? Let us know in the comments.

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