What is a Higher Lending Charge?
Each lender will have a threshold of how much they are comfortable or willing to lend to, and beyond that they begin to look at ways of either narrowing their mortgage offerings or mitigating the risk to themselves.
The way they may implement the latter is by charging a higher lending charge, which is also known as a Mortgage Indemnity Guarantee (MIG). You may be given this extra fee if the loan-to-value (LTV) ratio on your mortgage is beyond a certain limit.
For example, if you have taken on a 90% loan-to-value (LTV) mortgage, and have only put a 10% deposit into your property, you may find yourself with a bill for a higher lending charge.
Why do banks charge for this?
In effect, an MIG is an insurance banks use to protect themselves in case any unforeseen situations arise that stop you from being able to continue paying your mortgage. If the lender has to repossess your house and won’t recoup their investment because most of the house is still in debt, they may claim this insurance or use the funds to offset their losses.
Who does it protect?
It only protects the lender. And while you’re the one paying the fee, it does not cover the borrower in any way. You will still be legally obliged to repay all of your mortgage, or the shortfall if your house is sold in negative equity, whether the lender makes a MIG claim or not.
Can you avoid it?
The only way to avoid paying this charge is to put more money into your home from the outset and therefore lower your LTV. If you can stretch to at least a 20% deposit, you will bring your LTV to 80% or below, which should shield you from most lenders’ demands on an MIG being put in place.
That said, there are lenders out there who might take out this guarantee and absorb the charges themselves. This is something to consider at the very beginning of your mortgage application process.
How much is it?
Charges will vary from lender to lender, but generally the fees are between 6% and 8% of what equity you put into your home when you bought it. So if you have a 75% LTV, you will pay the percentage fee on the remaining 25%.
Bear in mind ‘subrogation’
If a lender makes a claim to the insurer via the MIG, the insurance company may come to you in order to reclaim the costs, seeing as you will be deemed responsible for it as the ‘third party’ involved. If you don’t pay this willingly, they may take legal action. So just because you’ve paid a higher lending charge, you may still not be protected from making up the shortfall owed to the lender, if there is one once your house is sold.