Interest rate insurance protects the holder of a variable rate mortgage or loan from rising interest rates. It is generally offered independently of the original borrowing and typically as an alternative to a remortgage onto a fixed rate.
As the
insurance policy
In insurance, the insurance policy is a contract (generally a standard form contract) between the insurer and the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for an initial payment, known a ...
protects only against the risk of the repayments rising because of
interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...
s (and not of the borrower defaulting on repayments) there is no requirement for the insurer to check the credit status of the purchaser or the value of any secured asset.
The absence of arrangement and valuation fees, bank and legal charges means that interest rate insurance can be cheaper to provide than a remortgage. The absence of credit checks and valuations means it can be made available to all holders of a variable rate loan.
As interest rate insurance protects the holder from rising interest rates but does not raise their initial pay rate, if interest rates fall, the policyholder will see a benefit in reduced payments on their mortgage or loan when compared to a fixed rate alternative.
History (UK)
Monetary Policy Committee Monetary Policy Committee (MPC) may refer to:
* Monetary Policy Committee (India)
The Monetary Policy Committee is responsible for fixing the benchmark interest rate in India. The meetings of the Monetary Policy Committee are held at least fo ...
member
Professor David Miles first highlighted interest rate insurance in the Miles Review in 2004 commissioned by Gordon Brown. Professor Miles suggested that it would provide greater security in housing finance. In the 2008 Budget, HM Treasury announced that the industry was ready to launch such a product.
In July 2008 MarketGuard launched an interest rate insurance policy RateGuard.
MarketGuard
/ref>
References
{{finance-stub
Types of insurance
Interest