Higher lending fees questioned says moneyfacts.co.uk

07 December 2006
Leading analysts are questioning the point of higher lending fees for mortgage customers and asking whether they are simply another mechanism to increase fee income.

Julia Harris, an analyst at moneyfacts.co.uk, said that nearly 40 mainstream lenders no longer charge higher lending fees but that surprisingly over three quarters of mortgage lenders still do.

Higher lending fees typically range between seven and eight per cent but can rise as high as 12 per cent. The charges are levied when borrowers take out mortgages at very high loan to property value ratio, typically over 90 per cent.

In the case of a higher lending fee that can be paid back over the term of a mortgage, the costs can prove even higher.

On a high loan to value mortgage a typical £3,000 higher lending fee on a 25-year term at an interest rate of five per cent can end up costing a borrower £5,262.

Ms Harris questioned what customers are paying for with the fees: "The higher lending charge offers a measure of protection to the lender if a borrower defaults on the mortgage, but it is important to emphasise that, although the customer has to pay the premium, it is the lender that benefits from any payout."

Although the risk to lenders is higher the greater the loan to value a mortgage has, Ms Harris said that products could be priced accordingly rather than charging expensive fees, often to first time buyers who can least afford them.

"With either a rising or stable property market the norm in the UK recently, it would be interesting to know how many claims have been made against what appears to be a somewhat outdates form of insurance," said Ms Harris.

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