Higher Lending Charges (HLC), also known as Mortgage Indemnity Guarantees (MIG) or Mortgage Indemnity Premiums (MIP), are additional fees that may be applied by lenders in the UK when borrowers take out a mortgage with a high loan-to-value (LTV) ratio. Here’s an in-depth explanation of what HLCs are, how they work, and their implications for borrowers:

What Are Higher Lending Charges?

1. Definition:
   • Higher Lending Charges are fees that a lender might charge to protect themselves against the risk of the borrower defaulting on a high LTV mortgage. High LTV mortgages are those where the borrower is borrowing a significant percentage of the property’s value, typically over 75-80%.
2. Purpose:
   • The purpose of the HLC is to mitigate the lender’s risk when the borrower has a small deposit, making the mortgage more risky for the lender.

How Do Higher Lending Charges Work?

1. Thresholds:
   • HLCs are usually applied when the LTV ratio exceeds a certain threshold, often around 75% to 90%. The exact threshold can vary between lenders.
2. Calculation:
   • The HLC is typically a percentage of the loan amount above the lender’s specified LTV threshold. For example, if the threshold is 75% LTV and the borrower takes out an 85% LTV mortgage, the charge might be calculated on the 10% difference.
   • The fee can be a flat fee or a sliding scale fee, based on the amount borrowed and the excess over the threshold.
3. Insurance:
   • The fee covers the cost of an insurance policy taken out by the lender, not the borrower. This policy protects the lender, not the borrower, against losses if the borrower defaults and the property is sold for less than the outstanding mortgage balance.

Implications for Borrowers

1. Cost:
   • Borrowers with high LTV mortgages need to be aware that the HLC can significantly increase the upfront cost of taking out a mortgage. This charge is in addition to other fees such as arrangement fees, valuation fees, and legal costs.
2. Loan Options:
   • Some lenders might offer to add the HLC to the mortgage amount, which can spread the cost over the loan term but will also incur interest, increasing the overall cost of the loan.
3. Lender Policies:
   • Not all lenders charge an HLC, and the policies and thresholds for HLCs can vary significantly. Borrowers should compare different mortgage products and lenders to find the best deal.
4. Negotiation:
   • In some cases, borrowers can negotiate with lenders to waive or reduce the HLC, especially if they have a strong credit history or can provide additional security.

Examples of Higher Lending Charges

• Example 1:
  • A borrower wants to buy a property valued at £200,000 and can only put down a 10% deposit (£20,000), requiring a mortgage of £180,000, which is 90% LTV. The lender’s HLC threshold is 75% LTV. The HLC might be 1.5% of the amount above 75% LTV, which would be calculated on £30,000 (£180,000 – £150,000), resulting in an HLC of £450.
• Example 2:
  • Another borrower is buying a property worth £300,000 with a 15% deposit (£45,000), needing a mortgage of £255,000 (85% LTV). If the lender’s threshold is 80% LTV and the HLC is 2%, the charge would apply to the £15,000 above 80% LTV, resulting in an HLC of £300.

Conclusion

Higher Lending Charges are additional fees that lenders may impose to mitigate the risk of lending to borrowers with high LTV ratios. While these charges provide lenders with protection, they increase the cost of borrowing for the borrower. It’s essential for potential homebuyers to understand these charges, compare different mortgage offers, and consider the overall cost of the mortgage, including any HLCs, when choosing a lender. Being informed and potentially negotiating these charges can help borrowers make more cost-effective decisions.