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

Mortgage lenders are milking thousands of pounds in extra insurance premiums from British borrowers, who receive no benefit from the policies. The back-door charges levied by lenders, called mortgage indemnity guarantees, can vary by up to £1,000 between mortgages of equal size.

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; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

News
people
News
A boy holds a chick during the Russian National Agricultural Exhibition Golden Autumn 2014 in Moscow on October 9, 2014.
news
Life and Style
love + sex
Sport
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle v United 1 player ratings
Arts and Entertainment
Victoria Wood, Kayvan Novak, Alexa Chung, Chris Moyles
tvReview: No soggy bottoms, but plenty of other baking disasters on The Great Comic Relief Bake Off
Sport
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle 0 Man United 1: Last minute strike seals precious victory
Life and Style
Tikka Masala has been overtaken by Jalfrezi as the nation's most popular curry
food + drink
Arts and Entertainment
Seth Rogan is one of America’s most famous pot smokers
filmAmy Pascal resigned after her personal emails were leaked following a cyber-attack sparked by the actor's film The Interview
News
Benjamin Netanyahu and his cartoon bomb – the Israeli PM shows his ‘evidence’
people
Arts and Entertainment
80s trailblazer: comedian Tracey Ullman
tv
News
i100
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Graduate Application Support Analyst

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Reach Volunteering: External Finance Trustee Needed!

    Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

    Christine McCleave: FP&A Analyst

    £36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

    Recruitment Genius: Sales Executive - OTE £40,000

    £15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

    Day In a Page

    War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

    Baghdad fights to win back Tikrit from Isis – but then what?

    Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
    Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

    What is it like to live with Alzheimer's?

    Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
    The Internet of Things: Meet the British salesman who gave real-world items a virtual life

    Setting in motion the Internet of Things

    British salesman Kevin Ashton gave real-world items a virtual life
    Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

    Election 2015: A dead heat between Mr Bean and Dick Dastardly!

    Lord Ashcroft reveals latest polling – and which character voters associate with each leader
    Audiences queue up for 'true stories told live' as cult competition The Moth goes global

    Cult competition The Moth goes global

    The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
    Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

    Pakistani women come out fighting

    Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
    Leonora Carrington transcended her stolid background to become an avant garde star

    Surreal deal: Leonora Carrington

    The artist transcended her stolid background to become an avant garde star
    LGBT History Month: Pupils discuss topics from Sappho to same-sex marriage

    Education: LGBT History Month

    Pupils have been discussing topics from Sappho to same-sex marriage
    11 best gel eyeliners

    Go bold this season: 11 best gel eyeliners

    Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
    Cricket World Cup 2015: Tournament runs riot to make the event more hit than miss...

    Cricket World Cup runs riot to make the event more hit than miss...

    The tournament has reached its halfway mark and scores of 300 and amazing catches abound. One thing never changes, though – everyone loves beating England
    Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

    Katarina Johnson-Thompson: Ready to jump at first major title

    After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
    Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

    Climate change key in Syrian conflict

    And it will trigger more war in future
    How I outwitted the Gestapo

    How I outwitted the Gestapo

    My life as a Jew in wartime Berlin
    The nation's favourite animal revealed

    The nation's favourite animal revealed

    Women like cuddly creatures whilst men like creepy-crawlies
    Is this the way to get young people to vote?

    Getting young people to vote

    From #VOTESELFISH to Bite the Ballot