Lenders lambasted for their 'outrageous' £1,500 charge

Homebuyers told to avoid mortgage deals where they will pay a hefty price for borrowing over 90 per cent
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The Independent Online

So you've taken out the mortgage, you've paid the solicitors' and surveyors' fees and you've stumped up for the stamp duty. Your savings have all but been swallowed up by the process of buying a new home, and then the lender taps your wallet again for something that won't benefit you at all.

This is the higher lending charge (HLC), previously known as the mortgage indemnity guarantee (MIG). It typically costs £1,500 and is levied by three-quarters of lenders, according to financial analyst Moneyfacts, on those who can't afford to put down a deposit of 10 per cent of the asking price.

It is there to protect the lender if a borrower defaults on the mortgage repayments and the property has to be repossessed. But mortgage specialists have long dubbed the fee "outdated".

"If there is any shortfall between the price the property is sold for and the mortgage amount, this insurance covers the difference - so the lender isn't left out of pocket," says Melanie Bien, associate director at broker Savills Private Finance. "It protects the lender and not the borrower - and yet the latter has to pay. It is an outrageous and outmoded charge."

She adds that if a bank or building society has concerns about the borrower defaulting, it begs the question of whether it should be lending in the first place.

"Credit checks and affordability assessments should mean the lender is doing enough to protect itself," she adds.

Critics question how this extra cost can be justified, especially when a growing band of lenders have withdrawn it.

In a recent report, Nationwide building society - which abolished its own charge in September 2000 - found that 800,000 borrowers had paid £1bn in HLCs in the past five years. Nearly 500,000 of these were first-time buyers - the very people who can least afford it.

The list of those that have scrapped the charge includes Cheltenham & Gloucester, Egg and Standard Life Bank. Those lenders still committed to levying it include the Halifax, Abbey and NatWest.

James Cotton from broker London & Country says: "Most people can't afford the charge so have to add it to the mortgage. But this way, you end up paying interest on the whole lot."

This could mean, for example, that over 25 years, a £1,500 HLC ends up costing you nearer £2,700, reports Nationwide.

Mr Cotton points out that some HLC-free lenders may offer home loans at a more expensive interest rate. "But even so, you are still generally better off going for a higher rate with no HLC."

This is especially true given that some lenders with HLCs also levy higher interest on those taking out bigger loans - so borrowers are in effect charged twice to offset the risk.

Nationwide executive director Stuart Bernau claims major lenders risk being accused of blatantly profiteering from those needing to borrow a high percentage of the property value.

"Prospective borrowers should shop around for their mortgage and always ask if an HLC is levied," he says.

Defending the charge, Paul Fincham of the Halifax, says it is for "high-risk business". But he insists very few people end up paying it. "The average deposit a first-time buyer puts down is 19 per cent," he says. "The majority understand that the greater the deposit they have, the better the deal and more favourable rate they will get."

However, Simon Tyler of broker Chase de Vere Mortgage Management counters that HLCs cannot be justified, and suggests borrowers calculate how much the charge will cost them before deciding on a mortgage offer.

The good news is that since the regulation of home loans came under the remit of City watchdog the Financial Services Authority a year ago, lenders have been required to present all their loan charges in a standard format known as the Key Facts Illustration. This document, which details all the fees that need to be paid, enables buyers to compare costs more easily - making it clearer exactly what they will be paying for their mortgage.

A higher rate was worth it

Ali Stokes, a primary school teacher, and her husband Richard, a pilot, bought their first home in Didcot, Oxfordshire, last year with a mortgage from Nationwide.

The couple were aware of higher lending charges and wanted to avoid them, so they used a financial adviser to find the best deal.

Ali, 23, says: "We borrowed 90 per cent of the property's value, and the fact that Nationwide doesn't levy HLCs was one of the things that attracted us to them.

"We wanted to keep upfront costs low so we could buy things for the house. A lot of the other lenders around were charging HLCs, but we were on quite a tight budget and so we looked for a deal that didn't carry the charge.

"As first-time buyers we had to save a lot of money for a deposit, solicitors' fees and stamp duty. Paying an HLC on top of that would have been too much."

Ali and Richard opted for a two-year fixed-rate deal at 5.5 per cent with Nationwide.

Their financial adviser had calculated that although this interest rate was relatively high compared to the competition in today's market, it would still work out cheaper over the two years than opting for a lower rate with a lender that would levy an HLC.

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