Lenders cover themselves and cash in on borrowers
House buyers pay through the nose to ensure that mortgage companies don't lose, writes Andrew Bibby
Sunday 05 February 1995
This means a borrower could end up paying almost £3,000 more than a neighbour living in an identical home in the same street over the lifetime of a mortgage.
For example, a borrower approaching Norwich and Peterborough or Lambeth building societies for a 95 per cent loan on a £60,000 house purchase is being asked to pay an indemnity of £1,200.
If the same person went to Yorkshire Bank, the charge would be just £450.
Millions of home owners pay through the nose for such guarantees, which are usually imposed whenever the amount being borrowed is 75 per cent or more of the property's valuation.
Yet they do not benefit from this controversial type of insurance, since the cover only protects lenders in cases where houses are repossessed and sold for a sum less than the outstanding loan.
Many borrowers are hardly aware of the extra charge; they assume it to be part of the overall mortgage.
Ironically, the contracts are usually worded in such a way that a dispossessed home buyer is still liable to the insurance company that provides the indemnity for any additional shortfall.
Amanda Davidson, a partner at the financial adviser Holden Meehan, said: "It's a bit of a cheek that such big premiums are being charged in the first place.
"As a borrower, you're paying for the lender's benefit, not your own. For prospective borrowers, this highlights the importance of not only checking a lender's headline interest rate, but also all the other hidden costs. Failure to do so can add several hundred pounds a year to borrowers' payments for up to 25 years."
The lenders' charging policies are exposed in this month's Your Mortgage magazine.
An extra £1,000 indemnity guarantee payment, almost always added to the mortgage, would cost a borrower more than £2,750 over 25 years at an interest rate of 10 per cent, the average over the past 15 years.
Building societies benefit from the psychological pressures many home buyers feel at the moment of purchase.
Many borrowers are won over by a society's headline mortgage rate, and they often fail to spot all the charges and other hidden strings until it is too late. The extra costs are mentioned only when the would-be home-buyer is already sitting in the building society's offices.
Usually, although borrowers know that a charge may have to be paid, they do not know the exact amount until their prospective home has already been valued and a formal mortgage offer is made. This is because the indemnity is based on the percentage of the home's valuation, which is only known when the valuer's report comes in. By then, it often seems too late to back out.
The societies make money out of indemnity guarantees by pocketing at least 30 per cent commission for arranging them.
In addition, some, such as Yorkshire Building Society, are now bypassing the insurance companies and setting up their own subsidiaries to handle the business. This means they can achieve huge cost savings. However, Yorkshire's premiums - which stand at £1,020 - are among the highest charged and have remained at their previous exorbitant levels.
The unpopularity of mortgage indemnity guarantee payments has already led some lenders, including Cheltenham & Gloucester Building Society, to scrap the charge.
The C&G abolished them last November, arguing that customers should not be asked to pay the lender's insurance premiums. Yet most societies continue to levy the premium and willingly admit that they make significant profits from doing so.
Ken Hughes, deputy general manager of Norwich and Peterborough, said: "We do load the premiums ourselves, but they are not as high as in the olden days." He declined to give details.
Lambeth Building Society said that it took a 30 per cent standard commission offered by its two insurers, Legal & General and Norwich Union.
"It has always been paid to societies. A lot of societies regard it as just another source of income," said Barry Tibbatts, Lambeth's insurance manager.
Mr Tibbatts added that the Lambeth chose to hold a third of this commission in reserve against possible losses.
Banks tend to charge lower mortgage indemnity charges, because of a quirk in regulatory rules affecting their lending policies.
Yorkshire Bank, for example, says that it does not underwrite its mortgage risks externally. Its relatively low charge is not paid to insurers but is simply an an acknowledgement of the higher risk involved.
While lenders usually begin to charge indemnity guarantee premiums when an advance of more than 75 per cent is sought, some impose them only on a loan-to-value above 80 per cent. This reduces the cost.
Among lenders imposing smaller charges are the Barnsley and Marsden building societies, as well as Barclays, Midland, Lloyds, Yorkshire Bank and Bank of Scotland.
In contrast, Norwich and Peterborough and the Lambeth demand an indemnity charge above 70 per cent of loan to value. Because a higher fraction of the mortgage advance is subject to this surcharge, borrowers pay more as a result.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 PlayStation and Xbox hacked by Lizard Squad
- 2 Christmas comes early to Hong Kong, as millions of bank notes spill out onto busy street
- 3 The 'Black Museum': After 150 years, public can visit police’s grisly crime museum
- 5 Vagina canoe artist defends herself over ‘obscenity’ charges
British actor Idris Elba cannot star as James Bond because he is black, says shock jock Rush Limbaugh
Rozanne Duncan: Ukip expels councillor for 'jaw-dropping' comments made in BBC TV interview
Germany anti-Islam protests: 17,000 march on Dresden against 'Islamification of the West'
Ukip member gets into Christmas spirit with Union Flag plea to Santa 'for our country back'
BBC director Danny Cohen: Rising UK antisemitism makes me feel more uncomfortable than ever
Alex Salmond has 'broken his word to the Scottish people' says Scottish Lib Dem leader
iJobs Money & Business
Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...
£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...
£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...
£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens