The 'antiquated cost' that burdens first-time buyers

Esther Shaw asks if you should snub a lender that makes you pay for its protection
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The Independent Online

Eye-popping house prices, stamp duty, valuation charges, legal fees, building and contents insurance, life cover... the list of costs for first-time buyers can appear endless.

Eye-popping house prices, stamp duty, valuation charges, legal fees, building and contents insurance, life cover... the list of costs for first-time buyers can appear endless.

However, a number of lenders are beginning to consider dismantling at least one of the hurdles that can price out those seeking a first foot on the property ladder.

Last week, the Woolwich bank announced it was abolishing its higher lending charge (HLC) - levied on those who can't afford to put down a deposit of more than 10 per cent of the asking price - and called on other lenders to follow suit.

Unlike most charges where customers get something for their money, the HLC instead buys insurance for the lender in case the home has to be repossessed - and the borrower owes more than the lender can get by selling it.

The Woolwich says its decision to scrap the charge, previously known as the mortgage indemnity guarantee (MIG), will save a first-time buyer around £2,000.

This figure is based on a property price of £155,000 - the national average, according to the Woolwich - and the borrower taking out a 95 per cent loan for £147,250.

Nearly seven in 10 lenders levy the HLC on buyers who need a loan close to the value of their desired property. The method of calculating this charge varies but it is based on the price of the home and the percentage borrowed.

Critics have long questioned how this extra cost can be justified when the money is used to protect the lender and not the borrower. Nationwide building society, which doesn't levy the HLC, is also calling on other lenders to with- draw it for first- time buyers.

The list of those that have already done so is not extensive but includes Cheltenham & Gloucester, Northern Rock and internet bank Intelligent Finance.

Lenders committed to the HLC include the Halifax, Abbey, NatWest, Alliance & Leicester and Portman building society.

Defending the charge, Halifax spokesman Paul Fincham says first-time buyers have wised up financially and the majority now save enough to avoid the charge. "The average deposit is now about £26,000," he adds.

But many mortgage specialists say there is no longer a place for what they describe as an "outdated practice".

"This charge is an antiquated and unnecessary extra cost," says Melanie Bien, associate director at mortgage broker Savills Private Finance.

"Some lenders don't charge it, so it is hard to find any justification for those that do."

With strong competition in the market, borrowers are urged to opt for a lender that doesn't impose this fee.

"With HLCs as high as £2,000, they really are best avoided," emphasises David Hollingworth from broker London & Country.

However, he warns that some lenders that do not charge the fee may offer home loan deals carrying higher rates of interest. Both the Woolwich and Nationwide levy higher rates for mortgages of more than 90 per cent loan-to-value, he adds.

"But even so, you're generally better off going for a higher rate with no HLC - especially if this is added to the cost of your loan and you end up paying interest on it [over the life of the mortgage]."

For example, he says, a £104,500 interest-only mortgage on a £110,000 property (95 per cent loan-to-value) would cost you £12,360 over two years with Portman building society's two-year fixed-rate deal at 4.68 per cent, which includes an HLC of £1,870.

By comparison, a higher two-year fixed rate with Bristol & West at 5.19 per cent is some £1,100 cheaper over the same period because there is no HLC. It also includes a free valuation.

The whole process comes down to calculations of fees, interest and loan rates - so ask a broker to do the sums for you to work out which method is more likely to save you money.

"This is another example of lenders making things increasingly complex for borrowers," says David Bitner from mortgage adviser Bradford & Bingley.

The good news, however, is that since mortgages came under the remit of City regulator the Financial Services Authority (FSA) last November, lenders must present all their loan charges in a standard format before you buy.

This new uniform Key Features Illustration document aims to give borrowers clear mortgage information - including details of HLCs - and so should at least help you compare the different deals on offer more easily.

ELEVEN DAYS THAT MADE A NEW HOME POSSIBLE

Andrew Purser and Karen Bath, both in their early 20s, are keen to buy their first home. But until now they had found themselves held back by the multitude of costs that are already stretching their finances.

"We are getting married in June and so don't have a lot of money to play with," says Andrew.

"We were able to get together a 5 per cent deposit, but were struggling to find the extra needed to cover solicitors' fees, the higher lending charge and stamp duty."

Hoping to buy their home - in Margate, Kent - for £120,000 on a three-year fixed-rate mortgage from the Woolwich, the couple were last week delighted to discover that the HLC had been waived.

Moreover, they had also discovered that they no longer had to find the money to pay stamp duty either.

In his Budget speech 11 days ago, Chancellor Gordon Brown announced that he was raising the threshold at which the basic, 1 per cent level of stamp duty has to be paid, from £60,000 to £120,000.

"Instead of worrying about money, we now have around £2,400 extra to spend on doing up our home," adds Andrew.

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