How to protect your mortgage against rate rises, and is it worth it
Up until recently the only way to guard against an increase in your mortgage rate was to remortgage to a cheaper deal. In today's tougher lending market it is not as simple to remortgage due to more stringent lending criteria.
There is now another option to protect yourself from mortgage rate increases - mortgage rate insurance
How does mortgage rate insurance work?
This product acts a bit like a capped rate mortgage by capping your payments at an agreed level, if this level is breached the policy will start paying out. Typically a policy will be for a term of 2 years or 3 years.
Are mortgage rate insurance policies available to all borrowers?
This varies from company to company with some setting a minimum mortgage amount and others requiring a minimum mortgage rate rise before the policy starts paying out.
Is mortgage rate insurance expensive?
Yes, it is rather expensive with cover for a typical £100,000 loan costing around £50 per month, to pay out on a 1% rise in the base rate.
Are there any things to watch out for with mortgage rate insurance?
Well, like with all things you should shop around to try and get the best deal. Also, you need to be aware that you are taking out a policy over a set term, so if rates rise one year into a two year term then payments will only be made for one year.
Is there an alternative to mortgage rate interest insurance?
If you are in the process of taking out a mortgage then it makes sense to set your budget at a level that will allow for a small rate increase in the future. If this is not possible then you should make sure you have investigated all mortgage/remortgage possibilities. If you can find a competitive fixed rate with low fees then this might a better option to give you peace of mind over the next few years.
However, for those borrowers who are currently in negative equity, mortgage rate insurance may well be the only option to give you peace of mind.
So will interest rates rise in the near future?
If you read my recent post Latest Interest Rate Predictions you will understand my thoughts on future interest rate rises.
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