Moneyfacts.co.uk questions HLCs

Julia Harris, analyst at Moneyfacts.co.uk, commented: “Last week, Portman Building Society announced that they would no longer apply a higher lending charge to its fixed rate mortgage range. But surprisingly over three-quarters of mortgage lenders still do charge a higher lending fee, a figure, which has not changed over the past 12 months.

“Typically the fee ranges between 7% and 8%, but can stretch as high as 12% in several cases. And while a fee may only apply to loan-to-values (LTVs) in excess of, say 90%, for example, most lenders will back charge this to a lower LTV of, say, 75% to 80%. See example below:

• Borrowing 100% on a property valued at £100K. Fee of 12% applied to LTVs over 90%, but is back charged to 75%. Therefore the fee would equal £3000.

“Being subjected to a HLC can be a very costly addition to the fees already associated with housebuying, and can make the initial savings on a competitive rate vanish almost immediately. Make sure you check out the full terms of any new mortgage deal, as the fees are often hidden beneath a great headline rate.

“Some lenders will insist on the HLC being paid upfront, while many others will allow this to be added to the loan. A slight conflict of interests, when they charge a fee for a high LTV but are prepared to increase this by adding additional amounts to your mortgage by way of a fee levied against a high LTV. Taking the example above, the actual amount repayable for a fee of £3K on a 25 year repayment mortgage, at an interest rate of 5% added to the mortgage, would mean an additional £17.54 per month, paying back in total £5,262.

“So what are you paying for?

“The HLC offers a measure of protection to the lender if a borrower defaults on the mortgage, but it is important to emphasise that, although the customer has to pay the premium, it is the lender that benefits from any payout. As well as this, the customer should be aware that the insurer could pursue them for reimbursement of any monies that have been paid out in respect of a lender's claim. See example below:

• If a borrowed was unable to repay their mortgage and the lender was required to sell the property, the deficit would first be covered by the insurance paid for by the HLC, but if this was not sufficient, the borrower could be liable for any shortfall.
• Property value = £70,000
• Mortgage value = £100,000
• Insurance cover = £20,000
• Borrower is still liable for £10,000

“Whilst it is appreciated that the risk for the lender is greater with higher LTV advances, lenders can price their products accordingly, rather than the customer, in many instances a first-time buyer, being faced with a hefty upfront fee at a time when they can least afford it.

“With either a rising or stable property market being the norm in the UK in recent years, it would be interesting to know how many claims have been made against what appears to be a somewhat outdated form of insurance. Is it just another mechanism for lenders to increase fee income? The risk protection theory seems a little weak, especially with many lenders seeking mortgages business with LTVs up to 130%, the more common use of Automated Valuation (AVMs) and the stability of the UK housing market."