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£1bn mortgage rip off

4th October 2005 | back to article listings BACK    print this article PRINT

Mortgage providers have earned over a billion pounds on unnecessary higher lending charges since 2000, Nationwide building society has warned. Over 800,000 mortgage holders in the past five years have been hit for the higher lending charges.

Higher lending charges are generally used by banks to discourage mortgage holders from taking out loans above 90 per cent of the value of their property, although they are charged on some mortgage providers on loans as low as 75 per cent of loan to value (LTV).

On average, providers charge around £1,500 as extra security against borrowers defaulting on higher value loans. The only benefit they provide to the borrower is the ability to borrow a slightly greater amount against their property.

To offset the impact of the one off payment, many providers will allow borrowers to add the sum to the value of their mortgage – which, while it lessens the shock of paying £1,500 in one go, does mean the average borrower pays £1,200 interest on the initial sum.

"Despite the negative publicity around higher lending fees, it is clear that many borrowers continue to find themselves faced with this charge at a time when their finances are already stretched and they are at their most vulnerable," Nationwide executive director Stuart Bernau told My Finances.

"Major lenders risk being accused of blatantly profiteering by charging both a higher lending charge and higher rates for those needing to borrow more than 90 per cent of the value of the property," he added.

The loans are particularly punitive for first time buyers, says Nationwide, who are both most in need of a large initial mortgage LTV to get onto the property ladder and will find themselves the least able to cover 'added extra' costs.

The company estimates that first time buyers make up almost two thirds of the people who pay higher lending fees, as most will require to borrow at least 90 per cent of the value of their homes.

But because higher lending mortgages also trigger higher interest rates as well as higher lending fees, Nationwide says that the most disadvantaged sector of the market is being hit the hardest.

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