A Higher Lending Charge (HLC), also known as a Mortgage Indemnity Guarantee (MIG), is a fee that some lenders in the UK mortgage market charge when the amount you borrow is high compared to the property’s value. Specifically, this charge is typically applied when the loan-to-value (LTV) ratio exceeds a certain threshold, often around 75-80%.
Here’s a breakdown of what this means:
Purpose of HLC
The Higher Lending Charge is essentially a form of insurance for the lender. When a borrower takes out a mortgage with a high LTV ratio, the risk to the lender is greater because there is less equity in the property. If the borrower defaults and the property is repossessed, there is a higher risk that the lender will not be able to recover the full amount of the loan by selling the property. The HLC helps protect the lender against this risk.
How HLC Works
- Thresholds: If your mortgage exceeds the lender’s specified LTV threshold, the HLC may be applied. This threshold varies among lenders but is commonly around 75-80%.
- Fee Amount: The amount of the HLC can vary, usually calculated as a percentage of the loan amount that exceeds the threshold. For instance, if you borrow £200,000 with a property value of £250,000 (an 80% LTV), and the lender’s threshold is 75%, the HLC might apply to the £12,500 that exceeds 75% of the property’s value.
- Payment: The charge can either be paid upfront or added to the mortgage amount, meaning you would pay interest on it over the life of the loan.
Implications for Borrowers
- Cost: The HLC adds to the overall cost of taking out a high LTV mortgage, making it more expensive.
- Affordability: Borrowers need to consider this additional cost when calculating the affordability of the mortgage.
- Negotiation: It’s sometimes possible to negotiate with lenders or shop around to find deals with no or lower HLCs.
Regulatory Context
The use of Higher Lending Charges has declined in recent years due to changes in regulations and market practices. Some lenders no longer impose this charge, opting instead for other risk mitigation strategies, such as requiring higher interest rates for high LTV loans or demanding larger deposits.
In summary, a Higher Lending Charge is a fee aimed at protecting lenders from the higher risk associated with high LTV mortgages. While it provides security for lenders, it represents an additional cost for borrowers seeking to finance a larger proportion of their property’s value.