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Mortgage edge – John Webster

Critics of the HLC have suggested that it is added to the loan purely to claw back money lost under the pretence of a low interest ratebut the HLC is needed to accommodate the additional risk that comes with higher LTV loans.

The non-conforming market has grown considerably over the past few years and a customer with adverse credit now has more choice than ever before.

Many specialist lenders offer a range of products to cover a spectrum of credit problems from near prime and extra light through to heavy adverse.

It is no surprise that customers with minor credit problems are looking for mortgage offers which are similar to those they might find on the high street and lenders are continually developing new products to meet the demand.

But there is no getting away from the fact that non-conforming lenders are exposed to a higher element of risk and certain aspects of the non-conforming product reflect this.

Higher lending charges have long been common in the non-conforming market and, like a number of specialist lenders, Preferred adds a higher lending charge to all loans over 75 per cent LTV. This is calculated on a percentage based only on the portion of the loan that exceeds 75 per cent LTV.

Recently, critics of the higher lending charge have suggested that it is added to the loan purely to claw back money “lost” under the pretence of a low interest rate.

But, in reality, the HLC is needed to accommodate the additional risk that comes with higher LTV loans. The funds raised by the HLC are a contribution towards potential losses that can sometimes be suffered in the case of a mortgage, where the property has had to be repossessed and the sale proceeds are not enough to repay the loan balance along with the costs and expenses of the repossession itself.

This approach is far from being exclusive to the non-conforming market. Many highstreet lenders require that customers borrowing over 75 per cent LTV pay an insurance premium (previously called a mortgage indemnity guarantee) that insures the lender against this additional risk.

At Preferred, we have spoken with insurance providers about the possibility of offering such a premium to our customers in place of our existing self-insurance scheme funded by the HLC. Because of the additional risk of the non-conforming sector, the premiums quoted would be more expensive for our customers than our own HLC charge and therefore it is not something we would put in place at this time. Having said that, we will continue to talk to potential providers and we will keep an open mind in case the insured route becomes a better proposition in future.

At Preferred, customers borrowing up to 75 per cent LTV do not pay a higher lending charge but higher LTV mortgages will always be popular across the entire mortgage industry, especially with first-time buyers struggling to raise a deposit.

Some lenders are developing specialist products to meet the requirements of customers seeking extremely high LTV mortgages. As the LTV increa-ses, so does the risk for the lender and therefore there is a greater need for insurance against the losses associated with these risks.

Another criticism of the higher lending charge is that the effect of adding the amount to the advance may mean that the mortgage payment only becomes clear to the customer upon completion.

The impact has always been clearly expressed on the mortgage offer but following M-Day and the introduction of the KFI, customers will have a better understanding than ever of the breakdown of charges contained in their mortgage. All the charges that make up the monthly payment, including the higher lending charge, should be clearly shown on the KFI and in the mortgage offer. The intermediary handling the application should talk through the KFI with the customer and explain what all the charges are for, leaving the customer fully aware of the payments expected each month and the total cost of the loan.

As a result, it should not be possible for a lender to deliberately hide the true cost of the loan or the existence of the higher lending charge.

In addition, it is also important that the higher lending charge is clearly marked on the lender’s product guide so that intermediaries are aware of the charge from the outset. Len-ders that sell directly to the customer should also ensure that higher lending charges are clearly stated on all their marketing material. Such transparency is clearly a good thing for the intermediary, the lender and, most importantly, the customer so they can make an informed decision about which mortgage to choose.

There are lenders who do not apply a higher lending charge but some of their other product terms may not be as advantageous to the client. It is for the intermediary to use his/her expertise to look at each product offering as a whole to determine which is most suitable in each indiv-idual case.

John Webster is managing director at Preferred

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