Tough insurers prompt mortgage lenders to change rules for loans

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INSURANCE companies have begun to introduce tough new terms on the policies they sell to mortgage lenders to cover losses on repossessed houses.

One building society, the Lambeth, is cutting back the amount it will lend because of changes in policies. Others are expected to follow.

Until this week the Lambeth would advance mortgages equivalent to 95 per cent of a property's value. But the building society is cutting this limit back to 90 per cent, which means borrowers have to put down a 10 per cent deposit.

Mortgage indemnity policies are paid for by borrowers but protect lenders. Most banks and building societies insist that customers buy them if they are borrowing more than 70 or 75 per cent of a property's value.

If the property is sold for less than the outstanding mortgage, the lender can claim on the policy for the difference plus a range of costs involved with the repossession and any arrears.

Insurance companies lost pounds 1.2bn on mortgage indemnity insurance last year, and although most raised premiums dramatically, they are rewriting the rules of the policies so that they can limit the amounts they pay out.

David Hayward, chief executive of the Lambeth, said the society's indemnity insurer, Legal & General, was prepared to offer cover for only 20 per cent of loans in future compared with 25 per cent in the past.

Since the society liked to cover itself on the portion of a loan above 70 per cent of the property's value, it felt it could not lend beyond 90 per cent. Mr Hayward said the society hoped to negotiate better terms for its indemnity cover. Meanwhile it could not take the risk of offering 95 per cent loans.

Some lenders have already stopped lending more than 90 per cent of property value, but not necessarily because of mortgage indemnity problems.

Others who, like the Lambeth, are having new terms imposed from this week, will continue to offer 95 per cent loans even though their claims would be limited. They feel they can afford to absorb the extra risk, especially when there is little mortgage business available anyway.

Lenders are concerned about the new terms and say building societies will have to find some way to pay for the extra risk they face, either through charging fees or higher mortgage rates for 95 per cent loans.