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The Higher Lending Charge Revolution

Apr 6, 2008
Several high profile mortgage lenders have begun to revolt against higher lending charges and chastise those who impose them on their customers. A higher lending charge (HLC) is a fee charged by a mortgage lender to a borrower if the loan-to-value ratio on their home loan product exceeds certain percentage - usually from seventy percent upwards. Higher Lending Charges are also known as Mortgage Indemnity Guarantees (MIGs).

The money collected from the higher lending charge is usually used by the mortgage lender to purchase an insurance policy that will protect them against the borrower potentially defaulting on the loan. The insurance product protects the lender but offers no protection at all to the home owner and usually comes into affect if a property is being repossessed.

It is for this reason that Higher Lending Charges have been criticised in the past for not offering borrowers any protection. The insurance policy will reimburse the mortgage lender for the outstanding balance of the home loan and any payment arrears incurred if the borrower defaults. However, this does not release the borrower from their liability as the insurance company will pursue them for the funds instead of pursuing the lender.

While some mortgage lenders have stopped applying Higher Lending Charges, many have not. This has caused a rift between institutions with different policies as the mortgage lenders who choose not to charge their customers extra fees on high loan-to-value home loan products have begun to criticise those that do.

Various parties within the mortgage industry, including many brokers, are backing the lenders who do not apply Higher Lending Charges. This is because the charge is levied on borrowers who cannot afford a large deposit. These borrowers, therefore, can least afford to pay an additional fee when securing a loan for their home. Mortgage brokers argue that because Higher Lending Charges are levied upon borrowers that are already considered to be high risk, it makes little sense to place an additional burden upon them.

Mortgage lenders who do charge the fee insist that they do not hit borrowers who can least afford them and that the fee can be added to the loan balance, thereby eliminating the need for borrowers to pay for it upfront. While this may be true, the borrower will still have to pay for the fee at some point in the future and will incur interest on the fee over the life of the home loan after it is added to the outstanding balance.

It is no wonder that the overall fairness of Higher Lending Charges has been heavily debated in the past and is continuing to cause friction in financial circles.

If you are looking for a home loan to buy a property, or if you are looking to remortgage a property you already own, ask your broker if the mortgage lender they recommend will levy a Higher Lending Charge before you sign on the dotted line. Such charges are often included in the fine print of mortgage offers so be sure to pay close attention when applying for your next home loan product.
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