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.

Time to get serious

In the eighteen months since the credit crunch began to engulf the UK economy, where have householders been hit hardest?

In the late nineties, household spending was growing at a rate of over 4.5% year on year. Ten years on, this figure has been reduced to just 1.9%. The fallout from the sub prime lending crisis has forced Britons to transform their cavalier spending habits to that of canny spendthrifts.

The economical volte-face has been driven by a number of factors, primarily rising energy costs, rising grocery bills, exorbitant fuel costs and narrowing credit capabilities. As the cost of living climbs and property values tumble, consumer confidence has wilted.

The big six energy suppliers raised their gas and electricity tariffs by an inflation busting 14% on average during winter 2007/08. These price rises were blamed on skyrocketing wholesale costs and record crude oil prices.

Gas and electricity costs are expected to jump again this summer. According to energy watchdog Energywatch, such are the overheads with which energy companies are grappling, these rises are necessary to prevent the energy suppliers from slipping into debt.

The days of cheap food supply also appear to be a thing of the past, as the cost of an average grocery basket of essential items took a £15 leap from May 2007 to May 2008. These increases are the product of supply problems in key producing countries, mainly caused by bad weather and an increase in the use of land to grow crops for biofuel.

Increasing food prices are forcing many consumers to use emergency payment methods. A spring survey by the Post Office revealed four in ten shoppers were using credit cards to pay for groceries, council tax and utility bills.

However, credit cards have become a precious and (in some cases) unattainable commodity. Banks have become reluctant lenders, resulting in a climate where only applicants with blemish free credit ratings are accepted for credit.

February saw online credit card supplier Egg cynically cull over 160,000 clients, in a move widely perceived as the disposal of unprofitable customers.

The narrowing mortgage market has additionally contributed to UK consumers’ financial woes, with first time buyers effectively excluded from the more competitive mortgage offers. As homeowners’ worries increased, record applications for mortgage debt advice were received by the Citizen’s Advice Bureau.

Leading mortgage providers such as First Direct began to pull their most attractive mortgages altogether during March/April 2008. The Co-operative bank and a number of smaller building societies followed suit, while Halifax raised rates and manipulated its acceptance criteria to punish those who couldn’t afford a substantial deposit.

So what happens in the future? Is the worst of the credit crunch over, as many analysts are predicting? Have we corrected our credit dependent spending enough? Could the next raft of energy increases be the straw that breaks the back of a fickle economy?

I’d love to hear your views.