Times are tough for borrowers, but unfair mortgage fees are making matters even worse.
Getting on the property ladder seems harder than ever for first-time buyers. Not only are mortgage rates rising, but lenders are demanding even higher deposits. And -- as if that wasn't bad enough -- rip-off mortgage fees are really rubbing salt in the wounds.
Gone are the days when cash-strapped wannabe homeowners could go for 100% or 100%-plus mortgages. These days it's pretty much a given that you'll need a 5% deposit to stand any hope of getting a mortgage loan. But, worse still, the costs of getting a decent deal are also on the up.
You'll usually have to stump up for a product fee. These days this can often run to several hundreds of pounds, if not more. But on top of that, if you only have a small deposit, you may well get clobbered with a higher lending charge too.
What Is A Higher Lending Charge?
A higher lending charge (HLC) protects the lender if you default on your mortgage. As you're only putting down a small deposit, you're considered a greater risk. To balance this extra risk out, you may be charged an HLC. The HLC is sometimes used to buy an insurance policy, which safeguards the lender from financial loss if you fall into arrears.
You don't necessarily need to pay the HLC upfront. You'll usually have the option of adding it onto your mortgage loan. Don't forget, by doing that you could end up paying interest on the charge over your entire mortgage term.
But this is what's really unfair: As well as paying an HLC, you'll also be stuck with a higher mortgage rate because the lender will see you as a 'risky' borrower.
Hang on a minute -- isn't the HLC supposed to protect lenders from 'risky' borrowers? This begs the question: Why do you need to pay a higher interest rate, when you're already paying an extra fee?
Not only will your monthly repayments be higher, but you'll also have to fork out more to pay the fees on your home loan. That means you'll be stung twice, all because you haven't been able to amass a larger deposit.
I first talked about HLCs in Buy Your First Home For Less. At that time, I revealed a minority of lenders -- roughly a third -- applied this charge if you wanted to borrow 95% of the property value. But since then the situation appears to have got worse.
To qualify for the lowest interest rates, you'll almost certainly encounter an HLC. Take a look at these top deals which are currently available to new borrowers with a 5% deposit:
Top Mortgage Deals At 95% Loan To Value
Lender | Rate | Product/ Booking Fee | Higher Lending Charge (HLC) | Total Cost Of Fees* |
|---|---|---|---|---|
Skipton BS | 5.79% fixed to 30/06/2010 | £799 | £2,953.50 | £3,752.50 |
Post Office | 5.89% fixed to 31/05/2011 | £599 | No HLC | £599 |
Stafford Railway BS | 5.99% standard variable rate | No charge | £1,993.20 | £1,993.20 |
Post Office | 6.09% fixed to 31/05/2011 | £599 | No HLC | £599 |
Clydesdale/Yorkshire Bank | 6.19% fixed to 31/07/2009 or 31/07/2010 or 31/07/2013 | £999 | £2,293.50 | £3,292.50 |
NatWest Mortgage Services | 6.20% variable | £1,499 | £2,409.00 | £3,908.00 |
Royal Bank of Scotland | 6.20% variable | £1,499 | £2,293.50 | £3,792.50 |
Source: Moneyfacts - as at 20 May 2008. Figures based on a mortgage loan of £156,750 - 95% of £165,000 property value, repayable over 25 years. *Excluding valuation fees, legal fees, stamp duty and any other applicable charges.
The Post Office is the only lender in this selection not to charge an HLC. But to qualify for the other deals shown, you must be prepared to pay an HLC of around £2,000 to £3,000, adding a significant chunk to your total mortgage fees.
Naturally, first-time buyers are going to find these lower rate mortgages attractive. After all -- according to the Council of Mortgage Lenders -- the average rate on a two-year fixed rate mortgage has crept up from 6.3% to 7% since last summer. But the HLC can be a heavy price to pay for the top rates.
Remortgaging
First-time buyers aren't the only borrowers to fall into the HLC trap. The charge may also come into play if you want to remortgage but you only have 5% equity in your home. If your loan to value (LTV) -- which is your mortgage loan as a percentage of the value of your home -- is just 95%, then an HLC could be an unavoidable hurdle for you too when you want to move to a new mortgage deal.
Can You Avoid The HLC?
Not all lenders charge an HLC. Check out all the costs before committing yourself. To help you compare deals, speak to a broker at The Motley Fool's award winning mortgage service.
Usually, the HLC will disappear if you manage to build up a deposit of 10% or more. True, that's a lot to ask of struggling first-time buyers, but if it's at all possible, you could enjoy a double whammy of lower fees and a lower mortgage rate too.
More: Why Rate Doesn't Rule For Mortgages | More Relief For Mortgage Payment Shock