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Beware of Hidden Mortgage Charges

If you are considering taking out a high loan-to-value mortgage, beware. Hidden amongst the small print may be a little something called a ‘higher lending charge’, which some lenders levy on high-risk loans.

Simply put, higher lending charges (HLC’s) pay your mortgage lender a sum of money which it uses buy an insurance policy to protect it in the event that your property is repossessed and then sold at a loss.

The catch however is that this indemnity policy does not absolve you of your responsibility for the shortfall as the insurer can still claim you for monies it pays out to your lender.

These charges are a particular problem for first time buyers who can find it difficult to avoid HLC’s imposed by some lenders on those who can’t afford a big deposit. These typically applied to those customers borrowing close to the value of the property.

If you are taking out a mortgage close to the value of the property or have a poor credit rating, make it a priority to ask whether an HLC applies and if so, what the real cost of the loan is in percentage terms with the HLC included. As with personal loans and credit cards it always pays to shop around for the best deal and extensive research carried out with regards to all charges. This is vitally important as a mortgage usually represents a sizeable debt over a lengthy period of time.

For example, for a two year fixed mortgage of 5.95%, incurring a 7.5% HLC, the equivalent mortgage rate, with the HLC incorporated, would be 6.87%. Initially the fixed rate looks enticing but with the HLC included you get the true rate, which is useful when comparing rates as you need to compare like for like.

However, some lenders beginning to do away with these charges which have been an obstacle to those seeking a first foot on the property ladder.

Last month, the Woolwich announced it was abolishing HLC’s - levied on those who can’t afford to put down a deposit of than 10 per cent of the asking price - and called on other lenders to follow their lead.

Whilst some lenders levy this charge, the best financial advice would be to save enough of a deposit in order to avoid the charge. Hopefully most lenders will soon scrap this outdated practice, which only protects the lender and not the borrower.

You have been warned.

More Information:

  • Loan Charges - article defining the common charges and penalties made on all types of loans


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