Sheltering from the storm

The credit crunch means an increasingly number of homeowners are worried about rising mortgage payments or not being able to afford to pay off their home loan. In fact earlier this year Financial Services Authority (FSA) research found that one in five of us are worried about meeting the costs of our mortgage repayments over the next 12 months. However there are a number of ways you can protect the roof over your head.

Fixed rate mortgages

Signing up for a fixed rate mortgage is the obvious way to ensure you're not at the mercy of any future interest rate rises as the interest rate you pay and your monthly payments will be fixed for a set period of time, usually anything from two to 25 years.

However, although some lenders, including Abbey and Cheltenham & Gloucester have recently announced cuts in their fixed rate products, consumers remortgaging at the end of their current deal will find fixed rates more expensive than when they last took one out a couple of years ago. Borrowers hoping to fix their mortgage repayments for three years are being hardest hit, with the average rate now standing at a staggering 7.25%. Two year fixed rate deals have also not being immune, with the average increasing to 7.07%. Even the best buy fixes are above 6% and although fixed rate mortgages offer security, experts generally suggest that tracker mortgages which track the Bank of England base rate are a better punt at the moment.

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Insure against rate rises

Marketguard is a new insurance product specifically for those with variable and tracker mortgages and in exchange for an upfront payment promises to protect you from interest rate rises. The policy will pay out when mortgage rates exceed a level specified when it is taken out.

Borrowers 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.

The policy has been met with mixed reactions with the majority of mortgage brokers and industry experts questioning whether the policy is really good value for money. A borrower owing £100,000 with 25 years of repayments to go could insure against a rate rise exceeding 1% for £42 per month on a repayment mortgage and £53 if they're on an interest-only deal. However premiums must be paid in full upfront rather than monthly which means someone with a £100,000 mortgage insuring against a 1% plus rate rise would have to pay £1,008 upfront on the repayment mortgage or £1,272 on interest-only. Another downside is that the policy only pays out when rates have risen by more than 1% so borrowers signing up for Marketguard will find themselves covering the first four quarter point rises themselves.

Protection cover for you, your mortgage, your family.

Mortgage Payment Protection Insurance (MPPI)

MPPI is designed to insure borrowers' mortgage payments in the event that they are unable to work for certain reasons rather than if rates rise. The policy pays your mortgage payments for a specified period of time if you suffer accident, sickness or unemployment. You pay a premium each month while your mortgage is running and if you become unable to work the policy starts to pay out, normally direct to the mortgage lender. There is usually a waiting period before payments are made of either 30 or 60 days.

Anyone opting for a MPPI policy should read the smallprint before they sign up. If you work less than 16 hours a week you wont be able to claim and you need to be in continuous employment for six months before the policy starts to be eligible. Self-employed people should check the policy terms to check they are covered before taking out a policy.

Although MPPI can be relatively cheap, ASU accident, sickness and unemployment cover can be a better choice. As well as paying your mortgage this policy will cover other debts such as loans and credit cards. Whichever product you choose it pays to shop around as buying this kind of cover direct from your mortgage lender will usually work out more expensive than going to a standalone provider.

Could you pay your mortgage if you suddenly found yourself without an income through accident, sickness or unemployment? Check out mortgage protection now.

18 July 2008 © Moneyextra.com

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