Question; What is a higher lending charge and how does it affect me as a borrower?
A higher lending charge is a fee lenders may apply to borrowing over a certain percentage of a property value.
For example a lender may choose to impose an extra charge on borrowers who borrow more than 80% of a property’s value, or perhaps more than 85% or 90% etc. Often the fee will be a percentage of the amount over this limit which you borrow.
A typical example would be a 5% charge on all lending over 80% of the property value. In this case if your home was worth £100,000 and you borrowed £90,000 you would pay 5% of the £10,000 over and above the 80% limit which would give a higher lending charge of £500.
Obviously it’s important to check how the fee is calculated as it could be based on the whole loan which would normally mean the fee could be considerably higher than the example above.
Another important consideration is what the lender does with the fee. Some lenders just charge a fee to increase their profit margin on these loans to cover potential losses if they have to sell properties undervalue at auction. However if the lender uses the fee to buy a Mortgage Indemnity Guarantee which would insure the lender against such losses, it’s important to be aware that in the event of you handing back the keys and the property being sold for less than the outstanding mortgage balance the insurer would then have the right to pursue you for their losses under the right of “subrogation”.
The FSA forced lenders to stop referring to these charges as Mortgage Indemnity Guarantee fee’s because it was worried that this gave the impression that such insurance policies would benefit the borrower as well as the lender, so be aware that if you pay this fee or have done in the past it will not protect you from the lender or insurer pursuing you for any outstanding balances should the property have to be sold at undervalue after repossession.