Mortgages. Higher Lending Charges Are Outrageous.

After you’ve scraped together a modest deposit for your new home, you may think you're all set. Think again. In addition to your deposit, you'll need to pay surveyors and solicitors. Then, the government takes its share through stamp duty, which is 1% of the property's price. If the house costs more than £250,000, the rate increases (see the information at the end of this article). You’re lucky if you can just manage these costs to become a homeowner at last!

But then, unexpectedly, the mortgage lender sends you a new bill for an additional £1,500. This fee, called a Higher Lending Charge (HLC), is applied if you borrow more than 90% of the value of the house. About 75% of all mortgage lenders charge this fee, and £1,500 is the average amount.

Unfortunately, the money you pay for the HLC doesn't benefit you directly. It’s a form of protection insurance that protects the mortgage lender, not you. The HLC pays the lender if you default on your mortgage, your property is repossessed, and the sale proceeds are less than the outstanding mortgage balance. In theory, the HLC covers the shortfall for the lender, but in practice, many lenders self-insure, making the HLC an extra fee to offset higher lending risks.

An HLC doesn’t relieve you of responsibility. If your home is repossessed and there’s a shortfall, you are still obligated to repay the lender, who will undoubtedly pursue the debt.

Most lenders who charge HLCs will agree to add the fee to your mortgage, but this offers little consolation. This means you’ll pay interest on the fee, and over a 25-year term, your HLC could cost you closer to £2,700.

In our opinion, HLCs should be obsolete. If a lender is concerned about default, they shouldn’t have lent the money. With today’s advanced credit checks and risk-based assessments, lenders should already be adequately protected. Additionally, you might end up paying a small interest premium for a mortgage above 90%, effectively being charged twice for the same risk.

The Nationwide Building Society, which does not charge HLCs, reported that over the last five years, £1 billion has been charged in HLCs by about 800,000 borrowers, including over 500,000 first-time buyers—mostly young people struggling to buy a home. We believe HLCs are a money-making ploy for mortgage lenders. The Higher Lending Charge, formerly known as a Mortgage Indemnity Guarantee, remains unchanged except for the name.

We think it’s time for the Office of Fair Trading (OFT) to investigate HLCs as they did with credit cards. The OFT recently ordered many credit card companies to reduce their charges by up to 40%. Applying similar measures to Higher Lending Charges would be greatly beneficial.

Current Stamp Duty Rates on House Purchases in the UK

• Houses under £125,000: No Stamp Duty

• Houses £125,000 to £249,995*: 1%

• Houses £250,000 to £499,995*: 3%

• Houses over £500,000: 4%

*HM Inland Revenue rounds up house prices to the nearest £5. Therefore, a house sold for between £249,996 and £249,999 will be rounded up to £250,000, and you’ll be charged 3% Stamp Duty on the entire amount.

Information correct as of the April 2006 Budget.