Another Massive Mortgage Swindle!
When arranging your next mortgage, check that you won't pay a fortune for rip-off insurance which protects only your lender!
Have you ever heard of a higher lending charge or HLC? (Oh no, not another TLA: three-letter acronym!)A higher lending charge is a fee paid by mortgage borrowers to protect lenders which lend them more than a certain proportion of the value of their home. For example, if you have a 30% deposit, most lenders won't charge you this fee, as you only need a 70% mortgage.However, if you can only stump up a deposit of 5% and therefore need a 95% mortgage, many lenders will charge you an HLC. This is because you're borrowing more than, say, three-quarters (75%) of the value of a property, so the lender levies an extra charge to reflect the extra risk of borrowing at a higher loan-to-value ratio.HLCs have been known by many different labels over the years, perhaps to disguise what a rip-off they are! They are also known as mortgage indemnity premiums (MIPs), mortgage indemnity guarantees (MIGs), additional security fees and so on. Whatever the name, they all do the same thing: protect lenders should borrowers default on their mortgage.However, here's the real con: if you default on your mortgage, your lender claims against your insurance policy to recover its losses. However, both lender and insurer have the right to pursue you for repayment of any sums paid out by your indemnity policy. Hence, it's a win/win game for lenders and insurers: if you never make a claim, they pocket your premium and, if you do, they have the right to recover all payouts via the Courts. Crazy, huh?This year alone, mortgage borrowers will hand over a fortune to lenders to pay for this archaic insurance. According to the Nationwide BS, 100,000 British borrowers will hand over a staggering £200 million in 2006 to mortgage lenders in higher lending charges, which comes to around £2,000 apiece. Ouch!According to independent financial researcher Moneyfacts, seven out of ten of the UK's 135 mortgage lenders charge HLCs, ranging from 1% to 12% of varying loan-to-value ratios, often on a sliding scale which penalises the borrowers with the smallest deposits.Of course, first-time buyers are hit hardest by HLCs, because few can afford to raise a 25% deposit before buying their first home, yet few will have budgeted for this extortionate charge. Indeed, most end up adding it to their mortgage, where additional interest could more than double the cost over the 25-year life of a typical home loan.Even worse, some crafty lenders effectively charge borrowers twice for this protection, first through HLCs and second through higher interest rates. What's more, lenders are pocketing these fees at a time when mortgage arrears and repossessions are at historically low levels. Boo!Nationwide BS abolished its higher lending charge more than five years ago, but many of its rivals still levy HLCs on borrowers with a 10% (or even 25%) deposit, as the following table shows. The costs are based on a £114,000 loan on a property worth £120,000, which is a 95% loan-to-value (LTV):Lender HLC costPremiumrate (%)Payable on LTVsbetweenNationwide BSNil N/aN/aHalifax1,7407.2575% to 97%NatWest1,7527.3075% to 95%Bank of Scotland 1,8007.5075% to 95%Abbey1,9208.0075% to 95%Royal Bank of Scotland 2,1488.9575% to 95%Note that the premium is charged on the entire portion of the loan which is over 75%. Hence, if you borrower 89.9% of the value of a property, most lenders won't charge you an HLC. However, borrow 90.1% and your HLC will be calculated on the portion of your loan which exceeds 75% of the property value. What a scam!So, when you shop around for a mortgage, don't stop at the headline interest rate. Be sure to check the small print, because there is a whole range of extra fees and charges waiting to catch you out. Without a doubt, my advice would be to get an independent expert to search the whole market to find a loan which suits you perfectly, such as award-winning no-fee mortgage broker London & Country Mortgages.More: Check out the mortgages in our Mortgage centre | Protect your home for less in our Insurance centre!Cliff owns shares in HBOS, parent company of the Halifax and Bank of Scotland.