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.

A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
New Real Madrid signing James Rodríguez with club president Florentino Perez
sportColombian World Cup star completes £63m move to Spain
Hotel Tour d’Auvergne in Paris launches pay-what-you-want
travelIt seems fraught with financial risk, but the policy has its benefits
Arts and Entertainment
booksThe best children's books for this summer
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
ebookA unique anthology of reporting and analysis of a crucial period of history
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

Programme Director - Conduct Risk - London

£850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

Business Analyst (Agile, SDLC, software)

£45000 - £50000 Per Annum + excellent benefits: Clearwater People Solutions Lt...

Finance Manager - Bank - Leeds - £300/day

£250 - £300 per day + competitive: Orgtel: Finance Manager - Accountant - Bank...

Compliance Officer - CF10, CF11, Compliance Oversight, AML, FX

£100000 - £120000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fi...

Day In a Page

Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

Noel Fielding's 'Luxury Comedy'

A land of the outright bizarre
What are the worst 'Word Crimes'?

What are the worst 'Word Crimes'?

‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
Can Secret Cinema sell 80,000 'Back to the Future' tickets?

The worst kept secret in cinema

A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Facebook: The new hatched, matched and dispatched

The new hatched, matched and dispatched

Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
Why do we have blood types?

Are you my type?

All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
Honesty box hotels: You decide how much you pay

Honesty box hotels

Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
Commonwealth Games 2014: Why weight of pressure rests easy on Michael Jamieson’s shoulders

Michael Jamieson: Why weight of pressure rests easy on his shoulders

The Scottish swimmer is ready for ‘the biggest race of my life’ at the Commonwealth Games
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn