BORROWERS will be able to insure their mortgages against interest-rate rises from next month after Alistair Darling pledged support for the new type of cover in last week’s budget.

The chancellor hopes the insurance, which pays out a lump sum if interest rates rise, could help ease the “payment shock” that has hit the housing market this year.

The government also restated its support for long-term, fixed-rate mortgages in a bid to protect homeowners, although brokers remain sceptical that the deals will take off.

With mortgage insurance, borrowers are paid the difference in their mortgage repayments if rates rise with a monthly tax-free payment on the day their mortgage is paid.

Rose-tinted specs fail to offer hope

The obvious justification for Mr Darling’s relatively upbeat scenario is that the outlook is fraught with uncertainty

BACKGROUND

• Darling's first Budget: the main points

• The Chancellor's speech in full

• Darlings first Budget: the reaction

• Chancellor hits the home budget as his debts soar

• Need to know: Budget 2008

The Chancellor delivers a modest Budget

As so often is the case, virtue, in terms of improving public finances, is not now, but at least a year away

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However, brokers said last week that straightforward short-term fixed-rate deals would work out cheaper than insurance.

MarketGuard, a derivatives trading firm, is to become the first company to offer borrowers’ insurance for residential mortgages in May. It charges a minimum of about £18 a month on a basic £200,000 loan, which works out at £432 for two years – the minimum policy available.

Suppose a borrower with a £200,000 loan took out a two-year fixed-rate mortgage from First Direct at 4.75%, with monthly repayments at £1,140. If interest rates rose, they would be quids in but if interest rates fell they would of course miss out on a cut in monthly repayments.

Alternatively, they could take a lifetime tracker from Cheltenham & Gloucester at 5.63% plus mortgage insurance. They would face monthly repayments of £1,262 in total – more expensive than the fix.

If the Bank of England cuts rates once again this year their basic repayments would fall to £1,214 – still more expensive than the fixed rate. If rates rose again next year they would receive £30 a month to cover the extra cost of repayments.

Melanie Bien of Savills Private Finance, a broker, said: “In the current climate trackers are so much more expensive than fixes that borrowers would be better off in most cases with the latter. Even if tracker rates come down, official interest rates would have to rise more often than they fell over the life of the policy for the insurance to pay for itself.”

Bien added: “There is also a danger here that people currently paying their lender’s standard variable rate (SVR) are deterred from remortgaging because they believe they are protected from rising mortgage repayments by insurance.”

However, Chris Taylor of MarketGuard, said the advantage of borrowers’ insurance was that it saved the “hassle of remortgaging”. “Borrowers are not tied to a single lender or mortgage product and they don’t have to go through the remortgage process, which can be time-consuming and require a great deal of paperwork. It’s a simple process and insurance can be bought online,” he said.

The chancellor also used last Wednesday’s budget to repeat his call for lenders to offer a wider range of long-term fixed rate-deals for up to 25 years.

The cheapest 25-year deal is Kent Reliance building society’s 5.5% fix with a £995 fee for loans at 75% of the value of the property. However, it has early redemption charges that amount to 3% of the amount so far repaid during the period.

Brokers said the cost of mortgages over 25 years work out more expensive than for the best two-year fixed-rate deals, although five and 10-year fixes looked better value.

If you remortgaged a £200,000 loan on to the First Direct deal every two years for 25 years, it would cost £257,264 including the arrangement fees – £18,881 cheaper than the Kent Reliance mortgage, which would cost £276,145.

However, First Direct building society also has a five-year fix at 5.29% with a £598 fee, which would cost £271,735 over 25 years – this is cheaper than the 25-year deal but still more expensive than the First Direct two-year fix. Brokers warn, though, that because of high demand, new borrowers could be made to wait nearly two weeks for their First Direct application to be processed.

Richard Morea of broker L&C said that there was increasingly less difference between long and short-term fixes. “The fees associated with remortgaging are such that borrowers may be better off with a long-term fix if they’re comfortable with that commitment, although perhaps not as long as the chancellor would like,” he said.

Ray Boulger of Charcol, another broker, agrees. He said: “The problem with 25-year deals around at the moment is that they are just too expensive. Borrowers need flexibility and a good rate.

“For example, Northern Rock has a 15-year fix that is fully flexible and allows overpayments and payment holidays. However, the rate is a hefty 6.69%.

“Much of what the chancellor said he wants is there in the market, but at the moment the lenders are constrained from offering low rates because of liquidity problems – these need to be fixed before rates can come down.

“It’s not a good time in my view to go into a long-term fix unless you take the view the market is going to get a lot worse and you want to lock yourself in. The timing has to be right – if not, you have to pay the penalty and start again.”

DEADLINE FOR ROCK SAVERS

SAVERS who were panicked into withdrawing cash from their Northern Rock Isas have until April 5 to reinvest in a new account.

The government confirmed in the budget that people who withdrew Isa cash at the height of the crisis will be able to keep their tax breaks.

Usually, when you close an account without transferring to another provider the tax breaks are lost for the year, but the government has said it will make an exception in this case.

The offer is available to savers who withdrew their cash in the six days after the crisis began on September 13.

However, they now have a choice of deals paying higher rates than Northern Rock. For instance, its instant-access Isa pays 4.49%. The best easy-access cash Isa is Barclays Direct Isa, which pays 6.5%.

SIMPLER CHILD TRUST FUNDS

PARENTS will find it easier to open child trust funds because of changes announced last week. From April next year providers will no longer have to receive a physical copy of the child trust fund voucher before opening an account.

Instead, they can open accounts with information such as the child’s date of birth and unique voucher number.

The changes will allow for telephone and internet applications with no need to post vouchers separately.

About 75% of British parents have opened more than 2.4m child trust fund accounts since the scheme was introduced in 2005.

Parents receive vouchers when they apply for child benefits.

Child trust funds allow parents to make tax-free contributions up to £1,200 a year until the child turns 18.

WINNER: A FIXED RATE DEAL WITHOUT EARLY REPAYMENT CHARGE

PAUL IVIN, 50, a City IT worker, took out a 10-year, fixed-rate loan with Coventry at 5.99% when he came off a two-year fix with Halifax at 4.6% this year. He can switch after five years with no early repayment charges.

Ivin, of Chalfont St Peter, Bucks, here with wife Fi and son Sam, said: ‘I’ve always gone for fixed-rate mortgages as I like the security and certainty of always knowing what the payments are.

‘The rate on the deal is a little higher than I would have liked. It has added £150 a month to my bill, but I’m worried interest rates will rise further. I’d rather draw the line at what I can afford now.’