Gambling on a rate rise…

The current mortgage market is not great. These are troubled times and no-one seems to know what will happen next. Fear… uncertainty… doubt…

What a perfect time for a new insurance product to jump onto the market!

Let me introduce MarketGuard. Launched last week, this new insurance is specifically for those with variable and tracker mortgages and in exchange for a hefty payment promises to protect you from interest rate rises. It has been praised as “revolutionary”, it is a “glimmer of hope” for us terrified consumers and oh shouldn’t we all jump at the chance of avoiding rate rises and relax in the glow of financial protection.

Well actually, getting this protection is incredibly costly and taking out a policy means gambling on very high increases indeed.

Let’s say you have a mortgage of £150,000 with 20 years left to run. Your current interest is 7% and your monthly repayments are £787. If you choose to take out MarketGuard insurance with 1% excess, this will cost you £58 per month for two years, a total of £1392.

Unless both the Bank of England Base Rate and your mortgage rate rise by over 1% then this is money completely wasted as you are liable to pay for the first four quarter point increases. Even if, at the end of the first year, both rates increase by a massive 2% (i.e. EIGHT quarter point increases) you would not have saved money by taking out the policy.

At this point you would be paying 9% on your mortgage - without MarketGuard your monthly repayments would be £913 and with its cover they would be reduced to £849. So MarketGuard would be saving you a total of £64 for twelve months. This adds up to a total of £768 which is a huge £624 less than you paid for the protection.

Basically, you are adding an extra 0.5% to your mortgage to insure against a 1.25% rise and the rates would have to rise by over 2.5% in this second year to make the policy actually worthwhile. I don’t know about you, but the odds don’t sound too great to me.

There are some further unsavoury elements to this policy. Firstly, although the payments are quoted as monthly, you will actually have to stump up the lump sum at the start of your policy – for the example above this is a mighty £1392. If you choose to cancel within 14 days MarketGuard will retain 30% (in this case £417) in fees and if you cancel after 14 days, they will keep the lot.

Secondly and crucially, is that this policy only lasts for two years. If you want to renew after this you can, but the interest rate will be ‘reset’ at the point of renewal. Basically, you will only be protected from rises if they increase further on the rate you are already paying, even if this has increased while you have had a MarketGuard policy.

Unless the cost of MarketGuard drops dramatically, those with fixed-rate and tracker mortgages should be very wary of it. If you are tempted by the security, ensure you weigh up carefully the costs involved and the odds of the policy paying out more than you pay to have it.

The best way to protect yourself rate increases is still to choose a fixed-rate mortgage, so if at all possible, you should opt for one of these.

 I’m eating my phone with rage…..

Wednesday 7th May, 2008 - £9,485.54 in debt…

If you asked any of my friends to describe me, I don’t think they’d use the phrase “quick to anger” very often. Unless any of them were hiding up a tree outside my window earlier today, when I called my credit card issuers about my interest rates.

The story so far: In my first posting, I detailed how much I owe on each of my cards, and their interest rates. After that humiliation, I was further shamed by the comments my post received: “Why don’t you ask them to lower your APRs? It’s easy – I can’t BELIEVE you’re paying that much interest! You must be some kind of mug!” - Or words to that effect.

I tried it today, and now I’d like to know where I’m going wrong.

First, the Barclays overdraft: “Sorry, that interest rate is set in stone. We have a department that helps those who can’t cope with their debt, but you’re not in sufficient difficulty.” Thanks – that’s great news.

Second, the Tesco card: “Sorry, your interest rate can’t be changed, but that’s because you’re not paying any interest until October 21st.” Although this was a welcome surprise (I thought my interest-free period had just run out), I don’t suppose you could call it a victory.

Third, the Capital One card: “No, you can’t change your interest rate. We don’t do that. Bye.” Short but sweet.

Fourth, the Barclaycard: I phoned them in January to block my card, and they had offered me a small cut in my rate, so I was hopeful they might do it again. Their response: “Ah, it looks like your card wasn’t blocked at all – I’ll just do that now. And, hang on a minute, your interest rate wasn’t lowered either!” WHAT?!?!?!

“You can lower it now though, right? CAN’T YOU?” I asked, calmly.

“No – we cannot lower your rate at this point in time.” And the advisor and her manager repeated that phrase over and over until steam shot out of my ears and I destroyed a small village.

So where am I going wrong? Is there some sort of trick I should use? Are the Barclaycard people duty bound to decrease my rate like they said they would? Is there anything I can do about this?