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Negative charges

Higher lending charges are coming under fire in the mortgage market.

Formerly known as mortgage indemnity guarantees, HLCs are fees imposed on customers who require a mortgage at a loan to value above a set rate.

They are seen by many brokers and some lenders as an antiquated way of structuring a mortgage. Lenders such as GMAC-RFC, Kensington and SPML do not charge HLCs.

GMAC-RFC head of marketing services Jeff Knight says: “We should not be seeing HLCs in the non-conforming sector. It is a prehistoric way of doing things and, on the whole, disappeared from the mainstream market years ago. We have never applied such a charge and I cannot understand why some lenders do.”

Paragon managing director John Heron says “Originally, HLCs were an insurance but the only reason why lenders apply HLCs now is because they can.”

Preferred Mortgages managing director John Webster sees things slightly differently. Preferred does not impose HLCs on customers borrowing up to 75 per cent LTV but Webster says HLCs are necessary to accommodate the risk of loss that comes with higher LTVs.

But some lenders argue that such arguments are no longer valid, with mortgage arrears and repossessions at an historic low.

According to the Council of Mortgage Lenders, there were 3,070 repossessions in the second half of 2004 compared with 3,160 in the first half and 3,610 in the second half of 2003.

Knight says lenders should be removing complexities and it would be easier and more transparent if they just added an additional margin to the mortgage rate for higher LTVs.

Association of Mortgage Intermediaries director Chris Cummings says HLCs could be a creeping charge that some lenders are using to help with the cost of mortgage regulation.

It has become widely acknowledged that the cost of regulation has far exceeded the original estimates of the FSA and the CML. Educated guesses of the one-off cost vary between 180m and 500m. Sub-prime lenders have been hit hardest, with more complicated key facts illustrations taking more time and using sophisticated technologies.

An even more worrying factor is the unclear manner in which the charge is shown on KFIs. The charge is often factored in at the end of the application process so the full impact is not felt until well within the mortgaging process. There are also concerns that the financial promotions regulations imposed by the FSA could find some lenders lacking in their duty to be truly clear, fair and not misleading.

For example, a sub-prime two-year loan fixed at 5.95 per cent incurring a 7.5 per cent HLC would cost 28 more each month than without an HLC. The equivalent mortgage rate would be 6.87 per cent – 0.92 per cent above the original rate – so customers may not be getting what they think.

Charcol senior technical manager Ray Boulger says: “Either in the case of a poor broker or more probably a lender, although the HLC may be mentioned, it may not be highlighted as it should be.”

He is concerned that some brokers will look at the mortgage rate without looking at the overall value.

Chadborn Baker and Kearle mortgage expert Peter Wright says: “Lenders tend to charge HLCs because the client has no other choice. From an IFA point of view, you would not use them bec-ause they are not absolutely necessary.”

Cummings says 10 or 15 years ago, HLCs would have been a justifiable lending tool in a UK mortgage market where payments were less stable. “HLCs started off as a basic commercial rationale. There are definitely things that creep in that are not immediately clear to the cli-ent. It is then left to the adv-iser to pick through these things and explain to the cli-ent as well as convince them it is not a charge the intermediary has slapped on but is from the lender,” he says.

Preferred Mortgages says it only does business through intermediaries so its marketing activities, including its advertising, are not intended for public viewing. However, it says the HLCs are clearly stated on its product guides.

Webster adds that the breakdown of costs shown on KFIs should be explained by brokers so that customers are fully aware of the payments expected each month and the total cost of the loan.

Wright says it is increasingly hard to find HLCs, so perhaps they are a dying breed. Nevertheless, HLCs are still creeping into sub-prime mortgage offers and there have been some off-the-record suggestions that some lenders are using the fee to self-insure, which could be something that the regulator might want to discuss.

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