Although interest rates usually fall when recession looms, there is no guarantee of that this time.
By Jeremy Gates
If UK rates rise from here, homebuyers lacking the protection of a long-term fixed rate mortgage could be squeezed.
This fear of 'what lies ahead' in the housing market will boost the appeal of a new product in personal finance launched on July 2.
Interest rate insurance is pioneered by MarketGuard, a new company belonging to the Association of British Insurers (ABI) and approved by the Financial Services Authority (FSA).
Its policies will pay out when mortgage rates exceed a level specified when they are taken out.
"We are overwhelmed by the early response - from lenders, house-builders, financial advisors (IFAs) and mortgage brokers," says MarketGuard chief executive Chris Taylor.
"We have established a strong demand for the product, which will sell through financial advisors and brokers in a few weeks' time."
It can also be purchased direct - online - from MarketGuard, although the insurer is neither regulated or authorised to offer advice before purchase.
Taylor says MarketGuard became possible because his team found a way of offsetting risk by using money market instruments. The rules were specially amended in the last Budget to clear the way for a scheme intended to bring more certainty to households in uncertain times.
"It also represents a revolution in the insurance world because policyholders don't have to claim. The first they know of a claim is when money goes automatically into their bank account," Taylor says.
MarketGuard is aimed at borrowers - roughly 50% of the total - who are not on fixed rate deals. It enables them to ensure monthly mortgage repayments cannot rise above a prescribed figure if rates rise.
"Today's borrowers are highly indebted and may have massively overstretched themselves to get onto the housing ladder," Taylor says.
"Our research shows that even the slightest increase in Bank of England base rate could tip people over the edge.
"Currently the only way for individuals to protect themselves against rising rates is a fixed rate mortgage.
"Our product can bring some stability to millions of borrowers either on variable rate mortgages, or nearing the end of fixed rate deals with little hope of getting a new fix because of tightened lending criteria or the prohibitive cost of remortgaging."
MarketGuard allows borrowers to choose their preferred insured rate at which their policy starts paying out: it can be 1%, 1.5%, 2% or 2.5% above the Bank of England base rate at the time of taking out the policy and the policyholder's mortgage rate at the same time.
When both rates rise by more than this specified amount, the insurance pays out.
It pays out for a total period of two years - but after the first 12 months, policyholders can fix cover for a further 12 months. It means cover is available on most MarketGuard policies for between 12 and 24 months.
A borrower owing £100,000 with 20 years of repayments to go could insure against a rate rise exceeding 1% for £39 per month on a repayment mortgage and £53 (interest-only); with 25 years of repayments ahead, the cost is £42 and £53 respectively. Premiums in all cases must be paid upfront.
But that first 1% of any rise in rates, after a policy is purchased, must be fully absorbed by borrowers.
Ray Boulger, senior technical manager at mortgage broker John Charcol, has mixed views about MarketGuard.
"The concept is good, and it is good to see innovation, especially in this market," he says.
"The market is pricing in a Bank Rate rise of 0.5- 0.75% over the next year, so borrowers are bound to be nervous."
At current level of premiums, however, Boulger questions whether MarketGuard is good value for money.
"As figures currently stand, it adds about 0.64% to the mortgage rate for borrowers who buy insurance against rates rising in excess of 1%.
"In fact, rates would have to rise by more than 1.50% to put you in profit from this policy - by recouping a total payout exceeding the total paid in premiums.
"That means Bank base rate will have to average at least 6.75% for the next two years - against the current level of 5% - for an insurance payout to cover the cost of premiums over that time.
"Even among the gloomiest forecasters, few think things will get as bad as that."
Boulger thinks interest rate insurance could have a future - particularly as lenders make it more difficult for many borrowers to get a fixed rate deal.
"But I suspect the ideal time to insure against Bank Rate increases is when the rate is low and not expected to rise," he says.
"The problem with insuring now is that the premium invariably factors in the increase which the market still expects. If the economy goes into freefall, that actually looks less likely to happen."
When the housing market eventually recovers - an almost unthinkable prospect amidst current mayhem - products like MarketGuard will probably be needed to get it going again. This product probably sets a path for others to follow.
INFORMATION: MarketGuard (0844 555 444 and www.marketguard.com); John Charcol (0800 718 191 and www.charcol.co.uk).
POUNDNOTES
:: While headline rates for savers look temptingly high, many 'best buy' accounts apply tight rules on how they are used, says Sainsbury's Finance.
It claims 26 of the top 50 instant/easy access accounts on balances of £1,000 have one or more of these conditions.
Typically, rules restrict the number of withdrawals, while four apply penalties to withdrawal and nine are only available to adults of a certain age.
With Sainsbury's Internet Saver account (paying 5.5%), customers face no restrictions in accessing their cash. It is also one of only three accounts which appeared in the top 50 best buys in January 2005 and is still there in June 2008.
:: Interest-only mortgages are getting harder to find, according to an analysis from mform.co.uk, a free service which works with lenders to pass on savings to borrowers.
It says only 20,400 interest-only loans have been approved this year, against 31,300 for the same period in 2007.
Switching to an interest-only mortgage can save around £2,400 a year in repayments on a £150,000 loan at 7%. On a repayment basis, monthly payments would be £1072.63 against £875 on interest-only basis.
However, mform.co.uk spokesman Francis Ghiloni warns: "Lenders are becoming more cautious about interest-only mortgages because of worries about house prices. They are also concerned that borrowers might not have a method of repaying the loan in place as they near the end of their mortgage term."
:: Many small investors are licking their wounds after the latest plunge in the FTSE-100.
But Ted Scott, who took over management of F&C UK Growth and Income Fund in July 2005, thinks things could get worse because inflation has not yet been fully factored into account.
"While we are now technically in a bear market for equities, we are not yet at the point when it is right to start aggressively buying," he says.
Scott, who turned F&C UK Growth and Income Fund into a top performer with stocks including Serco, James Fisher, Tullow Oil and funeral services firm Dignity, plus old faithfuls like Scottish & Southern, British American Tobacco and GlaxoSmithKline, has seen the fund's value rise from £14.6m to £147m.
Scott has carefully avoided certain sectors - housebuilders, general retail, travel and leisure - and slashed his exposure to small caps. Meanwhile he has looked for companies with resilient earning profiles and has gone overweight on defensives sectors like utilities, telecoms and tobacco.
For more information about F&C UK Growth & Income Fund, call 0800 085 2752. Alternatively contact a discount broker.
:: If you've got a serious cash liquidity problem, even death might not solve your problems.
Research findings from two surveys by AXA Sun Life Direct (ASLD) show the total cost of dying in the UK is now typically £5,923, including either a cremation (72% of funerals) which now average £2,160 each or a burial coming in at £2,620.
The DSS currently pays out around £45m to cover the costs of 35,000 funerals where families are unable to pay - but where possible it recovers some of that money from the deceased's estate.
AXA Sun Life Direct offers a four-page leaflet with useful tips, a funeral checklist and a breakdown of regional costs, available by calling 0800 169 2033 or from www.axawillguide.co.uk.
:: HIGH FIVE SAVERS:
Phone No Rate Account Period Deposit Interest paid
Birmingham Midshires www.askbm.co.uk 7.17% Internet Fixed Rate One Year Bond £1 OM
Principality BS via branches 7.15% (F) Fixed Rate Bond 95 Three Year Bond (S) £10,000 Yly
Heritable Bank 0845 607 1212 6.60% 60 Day Notice Issue 1 60 Days (B) £1,000 Yly
Bradford & Bingley bradfordandbingley.co.uk 6.51% Internet Saver 3 None £1 Yly
Abbey www.abbey.com 6.50% Instant Access Saver Instant £1,000 Yly
:: TOP FIVE BORROWERS:
Phone No Rate Period Max% Adv Fee Incentive
Barnsley BS 01226 733 999 5.69% for two years 85% £750 Yes
Norwich & Peterboro BS 0845 300 2522 5.75% for term 90% £999 Yes
Skipton BS 0800 446 776 5.79% to 30/08/10 90% £998 Yes
HSBC 0800 494 999 5.99% (FTB) discounted for term 90% None Yes
First Direct 0845 610 0100 6.19% for 10 years 80% £798 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T- Operated by Telephone
*W- Operated by Internet
*H- Operated by Internet/Telephone
*S- Available only to those aged 50 or over
*R- Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice)
