The UK mortgage market has changed fundamentally since 2007. Stricter lending criteria have created millions of ‘mortgage prisoners’ who cannot remortgage (e.g. high LTV, credit impaired, self-employed and buy to let). In addition, the large differential between variable and fixed rates means that many borrowers are unwilling to remortgage from their standard variable rate (SVR) or tracker (particularly long-term Bank Rate trackers).
Both the ‘cannots’ and the ‘will nots’ are therefore exposed to the effects of interest rate rises on their monthly mortgage repayments. The FSA estimates that this represents around 70% of all UK mortgage borrowers.
In a good example of its innovative nature, the industry has responded to customer needs with a range of products that can ‘cap’ an existing SVR or tracker mortgage without the need to remortgage. There are various products suitable for different customers, such as insurance policies like RateGuard, where the borrower pays a monthly premium to protect his mortgage payments against future Bank Rate rises.
Interest rates have always been unpredictable; the experts did not predict the fall of the Bank Rate from 5.75% to 0.5% and it is unlikely that they will accurately foresee future moves. These innovative new products offer the same protection as a capped mortgage to those who either cannot or do not wish to remortgage.
(this ’60-second strategy’ was first printed in the Summer 2011 issue of Argent, the journal of The Financial Services Forum)