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

Sport
Australia vs New Zealand live
cricket Follow over-by-over coverage as rivals New Zealand and Australia face off
Sport
Hamilton runs down the back straight in the rain
F1
News
Zayn has become the first member to leave One Direction. 'I have to do what feels right in my heart,' he said
peopleWe wince at anguish of fans, but his 1D departure shows the perils of fame in the social media age
Life and Style
Researchers found that just 10 one-minute swill-and-spit sessions are enough to soften tooth enamel and make teeth vulnerable to erosion
health
News
i100
Arts and Entertainment
The Regent Street Cinema’s projection room in the 1920s
film
News
Leah Devine is only the ninth female to have made the Young Magician of the Year final since the contest began more than 50 years
peopleMeet the 16-year-old who has set her heart on being the first female to win Young Magician of the Year
News
Jonathan Anderson was born in Northern Ireland but now based between London, where he presents a line named JW Anderson
peopleBritish designer Jonathan Anderson is putting his stamp on venerable house Loewe
News
Andy Davidhazy at the beginning (left) and end (right) of his hike
video
News
Taylor Swift is applying to trademark song lyrics from 1989
people
Voices
The popularity of TV shows such as The Liver Birds encouraged Liverpudlians to exaggerate their Scouse accent
voicesWe exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
Finacial products from our partners
Property search
  • Get to the point
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

    Recruitment Genius: Retirement Coordinator - Financial Services

    Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

    Recruitment Genius: Annuities / Pensions Administrator

    Negotiable: Recruitment Genius: You will be the first point of contact for all...

    Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

    £18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

    Ashdown Group: Learning and Development Programme Manager

    £35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

    Day In a Page

    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat
    Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

    Saudi airstrikes are fuelling the Gulf's fire

    Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
    Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

    The only direction Zayn could go

    We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
    Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

    Spells like teen spirit

    A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
    Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

    If fashion is a cycle, this young man knows just how to ride it

    British designer Jonathan Anderson is putting his stamp on venerable house Loewe
    Number plates scheme could provide a licence to offend in the land of the free

    Licence to offend in the land of the free

    Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
    From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

    From farm to fork in Cornwall

    One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
    Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

    Robert Parker interview

    The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
    Don't believe the stereotype - or should you?

    Don't believe the stereotype - or should you?

    We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
    How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

    How to make your own Easter egg

    Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
    Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

    Bill Granger's twist on Easter Sunday lunch

    Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
    Joe Marler: 'It's the way I think the game should be played'

    Joe Marler: 'It's the way I think the game should be played'

    The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
    Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

    Cricket World Cup 2015

    Has the success of the tournament spelt the end for Test matches?
    The Last Word: Justin Gatlin knows the price of everything, the value of nothing

    Michael Calvin's Last Word

    Justin Gatlin knows the price of everything, the value of nothing