Researching mortgage options and fees can be a confusing task, especially for first-time homebuyers.
One term that often pops up but is rarely understood is the Higher Lending Charge (HLC).
This fee may not be on every mortgage offer you come across, but when it is, it’s important to understand what it is for and how much it costs. Our guide aims to demystify the Higher Lending Charge, helping you make informed decisions as you take those exciting steps towards homeownership.
What Triggers a Higher Lending Charge?
When you’re applying for a mortgage, your Loan-to-Value (LTV) ratio is extremely important.
This ratio represents the amount you’re borrowing as a percentage of the property’s value. For example, if you’re buying a £300,000 home and you’ve got a £30,000 deposit, your LTV would be 90%.
Lenders have specific thresholds for LTV ratios, beyond which they consider the mortgage to be higher risk. It’s at this point that a Higher Lending Charge may come into play.
While these thresholds can vary from lender to lender, they commonly sit at 75%, 85%, or 90% LTV. So, if you’re borrowing more than these percentages of your property’s value, you may find yourself facing an additional fee in the form of a Higher Lending Charge.
What does loan to value mean?
When you borrow money to buy, or refinance, a home, the loan is typically expressed as a percentage of the property’s value. This is known as the loan-to-value ratio (LTV). Lenders look at your LTV when deciding if they’ll accept your mortgage application – the lower, the better.
HLC and Its Many Names
As you travel further into the world of mortgages, you’ll quickly realise that the industry loves its jargon!
The Higher Lending Charge is no exception and goes by several other names, each essentially referring to the same fee.
Here are some alternative terms you might encounter:
- Mortgage Indemnity Guarantee (MIG): This is perhaps the most common alternative name for a Higher Lending Charge. It’s an older term but still widely used.
- Indemnity Guarantee: A simplified version of Mortgage Indemnity Guarantee, but it means the same thing.
- Additional Security Fee: This term emphasises the fee’s purpose, which is to provide the lender with additional security against the loan.
- Mortgage Advance Premium: This term is less common but may appear in some mortgage agreements.
How is the fee calculated?
The Higher Lending Charge is usually calculated as a percentage of the amount you’re borrowing that exceeds the lender’s set threshold.
This percentage can vary from lender to lender but is generally between 6% and 8% of the excess mortgage amount.
In the past, most HLC/MIG fees would be charged when you borrowed at 75% LTV or higher. As you can imagine these fees would have been very high, and fully charged to the borrower/s.
With increased competition most lenders now cover this cost themselves upto around 90% LTV.
So if you are borrowing at 85% loan to value, there will be a HLC fee and insurance, but this is paid for by the lender.
If you borrow 90%-95% then many lenders will want that extra bit of lending fee from you.
Speak to your broker about any LTV break points that can help to lower the HLC fees. For example, a mortgage at 89% LTV will often have a lower HLC fee than one at 90%+.
What does the High Lending Charge protect?
One of the most important things to understand about the Higher Lending Charge is that it’s designed to protect the lender, not you, the borrower.
While you’re the one footing the bill for this additional charge, it serves as a form of insurance for the lender in case you default on your mortgage payments.
If you find yourself unable to keep up with your mortgage repayments and the lender has to repossess and sell your property, the Higher Lending Charge helps cover any losses they might incur. This is especially relevant if the sale value of the property doesn’t cover the outstanding loan and any unpaid interest.
You should be aware that paying a Higher Lending Charge does not absolve you of your obligation to repay the mortgage. If the property is sold for less than what you owe, you’re still responsible for making up the difference.
When and How is HLC Paid?
Understanding the timing and payment methods for the Higher Lending Charge can help you better prepare your finances during the home-buying process.
When is it Paid?
The Higher Lending Charge is usually levied once you’ve accepted a mortgage offer. It’s one of the closing costs you’ll need to account for before the mortgage process is complete.
Payment Methods
One-Off Payment: Some lenders require the Higher Lending Charge to be paid upfront as a lump sum.
Added to the Mortgage: Alternatively, you may have the option to add the charge to your mortgage amount, spreading the cost over the life of the loan. While this can make it more manageable, keep in mind that you’ll be paying interest on it.
Discuss these options with your broker so you can decide which one works best for you.
Can you avoid paying the fee?
The prospect of an additional charge on your mortgage is hardly appealing, but there are ways to avoid or at least minimise the impact of a Higher Lending Charge.
Lower Your LTV
The most straightforward way to avoid a Higher Lending Charge is to lower your Loan-to-Value (LTV) ratio. By increasing your deposit, you can reduce the amount you need to borrow, thereby lowering your LTV to below the lender’s threshold for an HLC.
Shop Around
Some lenders may absorb the Higher Lending Charge themselves as a competitive advantage. It’s worth shopping around and comparing mortgage offers to find a lender that either doesn’t explicitly charge an HLC or has more favourable terms at the loan to value you need.
What happens if you default on a mortgage?
While no one enters into a mortgage with the expectation of defaulting, it’s important to understand the legal implications associated with a Higher Lending Charge.
The first sign of trouble comes when you receive a notice of arrears from your lender, indicating that you’ve fallen behind on your mortgage payments. If you’re unable to catch up, the lender may initiate legal proceedings to repossess your property. This is a serious step that requires a court order, where various factors, such as your ability to make future payments, are considered.
Once the court order for repossession is granted, the lender will take control of your property and usually sell it to recover the outstanding mortgage amount. The proceeds from the sale are used to cover not just the mortgage but also any unpaid interest and additional charges, including the lender’s legal fees.
The Concept of ‘Subrogation’
If you default on your mortgage and the lender makes a claim via the Mortgage Indemnity Guarantee (MIG), the insurance company involved may seek to recover the costs from you, the borrower. This process is known as ‘subrogation.’
Legal Action
If you’re unable or unwilling to cover these costs, the insurance company may take legal action against you. This means that even though you’ve paid a Higher Lending Charge, you’re not absolved from making up any shortfall owed to the lender, if your property is sold for less than the outstanding mortgage.
Your Obligations
It’s essential to remember that the Higher Lending Charge is designed to protect the lender, not the borrower. You are still legally obliged to repay your mortgage in full, or the shortfall if your property is sold in negative equity.
Getting the right advice
A mortgage broker can provide a comprehensive breakdown of all the fees associated with your mortgage, including the Higher Lending Charge.
They can explain when you might face this charge, how much it could be, and any legal implications.
But that’s not all.
They will search through thousands of deals to find the one that’s just right for you. And then they can help with the paperwork when you apply.
If you would like to speak with an independent mortgage broker about your mortgage options then Respect Mortgages can help.
We can put you in touch with one of the UK’s best known brokers, who have qualified advisers all over the country.
Just give us a call on 0330 030 5050 and we’ll do the rest.
You will find more useful information in our: “Guide to Mortgage Fees“
What is a Mortgage Illustration?
A Mortgage Illustration is a personalised document that a mortgage broker will provide to you and it includes all of the mortgage costs and fees. This document is also known as a Key Facts Illustration (KFI), or occasionally a ‘mortgage quote’.
