Mortgages. Will you have to pay a Higher Lending Charge?
At last you’ve scraped together the money for a small deposit on your new home. On top of that you’ve got the money for surveyors and solicitors fees. Then you’ve got stamp duty to pay at 1% of the property’s price (if the price is over £250,000 the stamp duty percentage increases – see the information at the foot of today’s blogg). Phew! You’ll just make it – a homeowner at last!
Then the mortgage lender sends you a new bill that you hadn’t expected – another £1,500 please Sir. It’s called a Higher lending Charge (HLC) it’s charged if your mortgage is 90% or more of the house price. About three quarters of all lenders charge it - £1,500 being the average charge.
And guess what - it won’t benefit you in any way whatsoever! In practice you’re paying for a form of insurance that protects the lender, not you. The HLC pays out to the lender if the borrower defaults on the mortgage, the property has to be repossessed and the sale proceeds are insufficient to fully repay the outstanding mortgage. The HLC then pays out the shortfall to the lender.
But that doesn’t let you off the hook! Despite receiving everything it was owed, you still owe the shortfall to your lender and they’ll continue to chase you for the outstanding money.
Whilst most of the lenders who still charge HLC’s will agree to add it to your mortgage, that’s little solace. In any case that means that you’ll end up paying interest on the charge. Over a 25-year term, that’ll mean you payout closer to £2,700!
Our view is that HLC’s are outmoded. If a lender is worried that you will default, then they shouldn’t be lending to you. And with all the hi-tec credit checks and risk assessments they use to process your application, you would think the lenders were doing enough to protect themselves. In any case you may well end up effectively paying a small interest premium for a 90% plus mortgage.
According to a survey by the Nationwide Building Society, during the last five years £1 billion has been paid out in HLC charges by some 800,000 borrowers – just over 60% of which were first time buyers, the very people who struggle most to buy a home. It sounds to us as if the lenders charging an HLC may well be simply taking the opportunity to profiteer.
Could it be time for the Office of Fair Trading to open up the box and take a look inside in the same way as they did with credit card charges? They recently ordered a reduction of up to 40% in those charges.
Current rates of Stamp Duty on house purchases in the UK
Price of house under £60,000 No Stamp Duty
Price of house £60,000 to £249,995* 1%
Price of house £250,000 to £499,995* 3%
Price of house over £500,000 4%
*The Inland Revenue rounds up house prices to the nearest £5. So a house sold for between £249,996 and £249,999 will be rounded up to £250,000 and they’ll charge you 3% Duty on the lot!
