After saving up a small amount for a down payment on your new home, you might think you're all set. Think again. On top of that, you have to pay the surveyors and lawyers. The government then wants a piece. You have to pay 1% of the price of the property as stamp duty (if the house costs more than GBP250,000 the rate of stamp duty increases - see the information at the foot of this article). Phew! You're lucky that you'll make it; you'll finally own your own home!
Then, out of the blue, the mortgage lender sends you a new bill for another GBP1,500. They call it a Higher Lending Charge (HLC), and you have to pay it if you borrow more than 90% of the house's value. About 75% of mortgage lenders charge it, and the average amount they ask for is £1,500.
And guess what? The money you give them won't help you in any way! Not one jot. You are paying for an insurance policy that protects the mortgage lender, not you. The HLC pays the lender if you don't pay your mortgage and the lender has to take back your home and sell it, but the money from the sale is less than the amount you still owe on your mortgage. In theory, the HLC would then pay the lender the difference, but in practise, many lenders take on the risk themselves, so the HLC is just an extra fee to make up for the higher risk of lending.
But an HLC doesn't get you out of trouble. If your home is repossessed and there is a shortfall, you still have to pay the shortfall back to your lender. They will come after you for the money.
Most lenders who charge HLCs will gladly add the fee to your mortgage, but that's not much of a relief. In any case, this means you'll have to pay interest on top of the original fee. Then, your HLC will have cost you closer to GBP2,700 over a 25-year term.
We think that HLCs should have gone the way of the dinosaurs. If a lender thinks you won't pay back the money, they shouldn't have given it to you in the first place. And with all the high-tech credit checks and risk-based assessments used to process your application today, you'd think the lenders were doing enough to protect themselves. In any case, you may also have to pay a small interest premium for a mortgage of 90% or more. This means that in reality, you are being charged twice for the same risk.
The Nationwide Building Society, which doesn't charge HLCs, recently said that 800,000 borrowers charged GBP1 billion in HLCs over the last five years. It also found that just over half a million were first-time buyers, most of whom were young people who were having trouble buying a home. We think that HLCs are just another way for mortgage lenders to make money. By the way, the Higher Lending Charge used to be called a Mortgage Indemnity Guarantee, but they are all the same. Only the name has changed.
We think it's time for the Office of Fair Trading to look inside the box, just like they did with credit cards. The OFT recently told a lot of credit card companies to cut their fees by up to 40%. Higher Lending Charges could use a little bit of that magic.
Stamp Duty rates for buying a house in the UK right now
Houses under GBP125,000 No Stamp Duty
Houses between GBP125,000 and GBP249,995* 1%
Houses between GBP250,000 and GBP499,995*: 3%
Houses worth more than GBP500,000: 4%
- HM Inland Revenue rounds house prices up to the nearest GBP5. So, if you sell a house for between GBP249,996 and GBP249,999, they'll round it up to GBP250,000 and charge you 3% Stamp Duty on the whole thing.
Correct information as of the April 2006 Budget.
