Insurance company, MarketGuard, has recently launched interest rate insurance for residential mortgage borrowers.

The insurance is aimed at those borrowers who are on variable rate mortgages or who are coming to the end of their fixed-rate periods. With banks lending criteria continuing to tighten, MarketGuard hopes to become an alternative for those borrowers who do not want or are unable to get a fixed-rate mortgage.

The policy works by the borrower choosing what level of interest rate rise they wish to insure against (1.0%-2.5%) over the Bank of England’s (BoE) base rate at the time of purchase. Once the base rate rises above the insured level the policy pays the excess on the mortgage repayment. The cost of the policy is calculated by what level of rise the borrower wishes to insure against and the size of the outstanding mortgage. The full cost of the two-year policy must be paid upfront.

Ray Bolger, senior technical manager for Charcol Mortgages, told PIN: “Interest rate insurance is an interesting concept and one that will be of greater use in the future. Taking into account the effective cost of the 1% policy the borrower would need the base rate to rise over 6.5% for them to start seeing any benefit. I believe this is a remote possibility in the present climate and the base rate is more likely to come down over the next year. The borrower needs to keep a close eye on the market to predict when would be the best time to buy the policy. If bought at the right time the costs will be less than transferring to a fixed-rate mortgage.”