Society boots indemnities out the door

Nic Cicutti looks at a move that could shave thousands of pounds off home loans

Hinckley and Rugby Building Society last week created history by becoming the only society in Britain to abandon an insurance charge that can cost borrowers thousands of pounds.

The small Leicestershire society, which has just 8,000 borrowers, calculates that its action on mortgage indemnity guarantees (MIGs) could shave up to pounds 1,000 from the cost of a pounds 60,000 loan. With interest, this can triple across the lifetime of a mortgage. The cut, across Hinckley and Rugby's entire range of home loans, comes in addition to its discounted and fixed rates. These include a one-year discount of 6 per cent off a standard 7.25 per cent mortgage, leaving borrowers currently paying just 1.25 per cent.

Barry Hunt, chief executive ofthe society, says: "Borrowers have tended to find this upfront cost both unexpected and irksome. What we have decided to do is to meet the cost of the guarantee ourselves.

"In return, we determine the risks we accept. For example, we strictly apply the criteria of not lending more than three times a person's salary. In one way, doing this is also a valuable discipline for a society."

Ironically, the society's decision to screen its risks more carefully means that the MIG it pays on behalf of customers is considerably less than customers would be charged if they were paying for it themselves.

MIGs are imposed by lenders to insure against the possibility that a catastrophic drop in house prices, coupled with the borrower's inability to pay the loan, could leave them facing a huge bill in the event of repossessions.

Hinckley and Rugby's decision places it within a small elite, which includes Direct Line and Cheltenham & Gloucester, the lender bought by Lloyds Bank in 1995. Neither of these organisations - they are not building societies - levy MIGs on their loans, arguing that carefully applied lending criteria are enough to weed out bad risks and prevent a repeat of the repossessions crisis of the early 1990s.

A spokeswoman at C&G says: "We decided in November 1994 that we did not wish to impose MIGs on borrowers. We found it was easier to satisfy the Building Societies Commission that we could do this because of our target market."

C&G has traditionally targeted borrowers in the upper-income bracket, many of whom need smaller loans relative to a property's value, she adds. "We are looking at more seasoned borrowers and they may be second, or even third-time buyers." C&G offers a 6.94 per cent mortgage to first- time buyers, plus a cashback worth up to 2 per cent of the loan.

Portman, the Bournemouth-based building society, has also scrapped MIGs for those wanting one of its 7.25 per cent variable-rate loans - but only for first-time buyers. A spokesman says: "We have found that if a first- time buyer comes to us and has managed to save 2.5 per cent of a pounds 60,000 loan, that is quite an achievement. If we ask them to pay the indemnity as well, it may be the straw that breaks the camel's back."

MIGs became important in the early 1990s during the collapse in the housing market. They are usually imposed whenthe amount being borrowed is 75 per cent or more of the property's valuation - millions of home owners pay them.

Over the lifetime of a mortgage, a borrower could end up paying almost pounds 3,000 more than a neighbour living in an identical home in the same street. A survey in 1995 showed that a borrower approaching the Norwich and Peterborough or Lambeth building societies for a 95 per cent loan on a pounds 60,000 house purchase might be asked to pay an indemnity of pounds 1,200. If the same person went to Yorkshire Bank, the charge would be just pounds 450.

An extra pounds 1,000 indemnity guarantee payment, almost always added to the mortgage, would cost a borrower more than pounds 2,550 over 25 years at an interest rate of 9 per cent. Moreover, many lenders gain up to 30 per cent commission from the indemnity premiums they add to loans. In some cases, lenders set up their own insurance companies to handle the premiums, and thereby rake in even more money.

Banks tend to charge lower MIG rates because of a quirk in regulatory rules. They do not have to underwrite mortgage risks externally and their relatively low charges are usually an acknowledgement of higher lending risk.

Some lenders impose MIGs on advances only above 80 per cent of the property's value. 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. Because a higher fraction of the mortgage advance is subject to this surcharge, borrowers pay more.

Another small lender, Leeds & Holbeck, has scrapped the traditional mortgage fees levied on borrowers, which have usually cost hundreds of pounds. "It may not be a huge amount, but it is still a good deal," a spokeswoman says.

Start your day with The Independent, sign up for daily news emails
New Articles
tvDownton Abbey Christmas special
Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)
tvOur review of the Doctor Who Christmas Special
peopleIt seems you can't silence Katie Hopkins, even on Christmas Day...
Arts and Entertainment
Jenna Coleman as Clara Oswald in the Doctor Who Christmas special
tvForget the rumours that Clara Oswald would be quitting the Tardis
Arts and Entertainment
Japanese artist Megumi Igarashi showing a small mascot shaped like a vagina
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Life and Style
Arts and Entertainment
Left to right: Stanley Tucci, Sophie Grabol and Christopher Eccleston in ‘Fortitude’
tvSo Sky Atlantic arrived in Iceland to film their new and supposedly snow-bound series 'Fortitude'...
Arts and Entertainment
The Queen delivers her Christmas message
newsTwitter reacts to Her Majesty's Christmas Message
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Day In a Page

A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

Christmas without hope

Gaza fears grow that conflict with Israel will soon reignite
After 150 years, you can finally visit the grisliest museum in the country

The 'Black Museum'

After 150 years, you can finally visit Britain's grisliest museum
No ho-ho-hos with Nick Frost's badass Santa

No ho-ho-hos with Nick Frost's badass Santa

Doctor Who Christmas Special TV review
Chilly Christmas: Swimmers take festive dip for charity

Chilly Christmas

Swimmers dive into freezing British waters for charity
Veterans' hostel 'overwhelmed by kindness' for festive dinner

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all