Avoid High Percentage Mortgage Lending Fees

Note: When starting a new mortgage, the high percentage lending fee or mortgage indemnity guarantee can be a nasty surprise. But it is possible to reduce the cost of this unpopular expense. This article looks at different ways to avoid or reduce the high percentage lending fee.

Avoid paying a high percentage lending fee

A High Percentage Lending Fee is a one off payment to your lender that THEY use to insure themselves against any loss THEY may suffer if the borrower (i.e. you) can’t keep up with the repayments and they have to repossess.

Yes, that last paragraph is correct. It’s insurance that YOU pay for, but it doesn’t protect you! Lenders normally require you to pay this fee if you want to borrow more that 90% of the value of the property. Some still insist upon it for all loans above 75%. It’s your penalty for being unable to scrape together a big, fat deposit!

But that’s not all, it gets worse! We haven’t discussed the price yet.

Most lenders have a sliding scale of high percentage lending fees similar to those shown below. It doesn’t take a genius to work out that the one-off fee can cost anything from several hundred to several thousand depending upon how much you’re borrowing.

Typical high ratio lending premiums

Loans of up to 90% of the property price = 4% of the amount borrowed above 75%
Loans of 90% - 95% of the property price = 6% of the amount borrowed above 75%
Loans of 95% - 100% of the property price = 8% of the amount borrowed above 75%

For example, if you want to buy a house valued at £150000 and need to borrow 95% of its value (£142500) the high ratio fee could cost 8% of £142500 (95%) less £112500 (75%) = £30000 = £2400

Two thousand four hundred pounds of your hard-earned folding stuff! And what for? Just to keep your lender happy! To allow your bank manager can sleep at night!

And I’m not finished yet. Due to all the other expenses associated with buying a new house and moving, most people don’t have sufficient funds to pay for the high percentage lending fee outright. So in most cases the cost of the fee is simply added to the amount of the mortgage. And the lenders are only too happy to oblige.

But that just compounds the problem, if you excuse the phrase. It just rubs salt into the wound. Not only do you have to pay a blatantly protectionist penalty, but then you’re charged interest on it for perhaps 25 years. You’ll probably end up paying more than double the amount that you were charged for it in the first place. A high percentage lending fee that originally cost £2400 could eventually cost you £4800 or even more over the life of a typical mortgage!

So what can be done about it?

Well, the first option is to avoid having to pay the fee. This can be done in one of two ways:

Borrow less than 90% of the value of the property

This means that you need to keep saving until your deposit is worth at least 10% of the property’s value. I know that’s easier said than done when you face the prospect of having to accumulate what could amount to tens of thousands of pounds, but it will save you money in both the short-term and the long-term.

Choose your lender carefully

In recent years, due to greater competition in the mortgage market, many lenders have dropped their requirement for buyers to pay this high lending fee. So shop around for the best deal! This little piece of information alone could save you thousands and help you to pay off your debt early. The only thing to watch out for is unscrupulous lenders who don’t charge a high lending fee, but try to reduce their risk of loss by charging a higher rate of interest.

Don’t save money with one hand and then give it back with the other!

If you can’t find a lender who will grant you a high percentage mortgage without this fee, and you can’t raise a deposit of over 10%, then you’ll have to accept this extra cost. But you can still take steps to minimise the amount.

Save as big a deposit as you can manage

The bigger your deposit, the less your will cost. After all, if you only have to borrow 92% of the value of the property instead of 95%, the risk to the lender’s money won’t be as great if you can’t keep up with the repayments. And they shouldn’t expect as much protection, right!

So approach different mortgage lenders and ask about their rules on high percentage lending fees. By adding just a few hundred pounds to your deposit you may be able to jump from one band to a cheaper band (e.g. 96% to 94% or the value of the property), and cut the cost of the high percentage lending fee by a few hundred. This is particularly important if you’re intending to add the fee to the loan, because the interest will magnify the cost even further.

Select the best payment method

If you must pay a high percentage fee, consider other ways of paying for it rather than just adding it to the overall mortgage. Consider using a credit card or a small personal loan to pay for it. These methods of borrowing may be at a higher rate of interest than your mortgage but they will be repaid over a much shorter period. This should save on the overall amount of interest paid on the money borrowed to pay the fee. But before you do that, make sure that you’ll be able to afford to repay the short term loan.

Next: Select The Right Mortgage For Your Needs

Previous: Save Money On Your Mortgage Before It Starts

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