Society boots indemnities out the door
Nic Cicutti looks at a move that could shave thousands of pounds off home loans
Sunday 12 January 1997
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.
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