With the majority of banks forecasting further drops in the housing market next year combined with concerns over the economy and rising unemployment, re-mortgaging certainly won’t get any easier in the short term.
Therefore viable alternatives are needed for clients finding it difficult to re-mortgage, or for those enjoying a low SVR and not yet ready to fix into a higher rate. Interest Rate Cap’s offer a viable alternative for many as they offer a known risk within, what is currently, an uncertain environment.
As Enness Private Clients explain:
"An interest rate cap works as a hedge, or upper limit to your interest rate to protect against future upward BoE base rate movements. It’s executed as a derivative contract between an individual and the market, a Cap will allow consumers to protect themselves against the ‘downside’ of adverse rate movements but crucially, will still allow them to enjoy the benefits of the low rates we are currently experiencing."
Clients can buy into a rate of their choice; 3%, 4%, 5%, etc. (obviously the lower the rate the higher the cost) for a set period of time; 2yr, 3yr, 4yr, 5yr and so on (again higher fee for longer period).
The end result being that when rates move above the rate purchased the Interest Rate Cap pays back the amount over and above the contract price to the individual for the duration of the contract.
For example; if you have a 3% cap for £500,000 over 5 years and the base rate is 5% for 3 of those years, you will receive a payment equal to 2% per annum.
With commentators ever more confident that once rates start increasing they will do so sharply, this product offers a lot of security for those that are unable to secure a re-mortgage, without actually having to be in a position to qualify for a re-mortgage.
As the contract is taken out against the market, mortgage criteria such as income or loan to value or rental income are not important. The product will also be portable so will not prejudice against switching lenders further on down the line.
The main beneficiaries are those that lenders do not currently see as that appealing; landlords with large portfolios’ and those without enough equity in their homes, but also those on low SVR’s or lifetime trackers, such as Intelligent Finance, C&G, Woolwich, HSBC, etc., who currently have low rates but wish to protect themselves over the medium to long term.
Minimum caps are 500k, so not everyone will qualify but if you have a concern over future rate movements, this serves as a viable alternative for many worried consumers unable to re-mortgage in the interim.
