Higher Loan To Value Fee

The higher loan to value fee, used to commonly be called a "mortgage indemnity guarantee premium". It often has a different title depending on the lender, and is generally abbreviated to HLV or MIG, or something similar. Regardless of what it is called, it's going to cost you money. Once very common, the charge has reduced in significance over the last 10 years, with some lenders scrapping it completely.

Here's the logic behind it:

Lenders have always been comfortable advancing up to 75% of the value or purchase price of a property. There are two main reasons for this:

• The can be fairly certain that if they have to re-posess, they will quickly be able to sell the property for a sufficient sum to repay the amount that the defaulting mortgagee has borrowed.
• There is less likelihood of a borrower defaulting on the loan, if they have a substantial stake in the property, which they stand to lose.

However, if they are lending above 75% of the purchase price, their risk of losing money when a borrower defaults increases. In fact the risk to the lender gets progressively worse, the higher the loan to value (LTV) goes.

At the extreme, when 100% of the purchase price is being advanced by the lender, with no funds coming from the purchaser, the lender is in a very risky position.

From the lenders point of view, they have advanced money, often to a FIRST TIME BUYER, who has no record of successfully meeting mortgage payments on time. Further, their borrower has no financial stake in the property, and therefore, little incentive to "fight to keep a roof over their head" if things go wrong.

So the lenders have progressively higher risk from their comfort zone of 75% LTV upwards.

Their solution to this was to insure this risk, charging the premium paid for the insurance to the borrower. And thus the "mortgage indemnity guarantee premium" was born.

lets look at this in practice:

Heres a typical fee scale for a lender that levies this charge  

fee
fee
fee
fee

So for a £100,000 mortgage and a LTV of 80%, the fee charged would be £

And for the same mortgage with a LTV of 100% the fee charged would be £££

This seems equitable, i.e. Those posing the greatest risk bear propotionally higher cost. However it gradually dawned on lenders, that they were asking those with the least capital to suddenly find substantial funds. Their solution was to ADD the fee to the loan.

THE STING IN THE TAIL

What most borrowers didn't realise, was that the premium they paid offered no insurance to them, only to the lender. In the event of a shortfall, the lender would utilise the insurance to ensure that they didn't make a loss. The borrower then found out that it was THEY who were liable for the shortfall, not the insurace provider.

Here's an example:

Mr and Mrs Smith bought a house for £100,000. They had a deposit of £5,000, and a mortgage of £95,000. The mortgage indemnity guarantee premium of £1,700 was added to the loan (8.5% x £20,000) All was well until, over a period of 18 months, Mr Smith, became ill, lost his job, and then died. The only life cover that Mr Smith had was attached to his company pension scheme, of which he was no longer a member at the time of his death. Since they bought the property, house prices had fallen by 15%.

The grieving Mrs Smith was left with little income, two children to support, and no possiblity of meeting her mortgage payments. Neither could she sell the house at it's current market value of £85,000 as she would be unable to repay the mortgage. Social security made the interest payments to her lender after a while, but the capital payments were not not met, penalties were applied by the lender, and the arrears began to spiral. After a suitable grace period, the lender lender began proceedings to reposess the property and recover the debt.

The house sold for £80,000 with the mortgage debt being £99,500 including costs and interest levied on missed payments. The lender claimed on the mortgage indemnity policy, recovering most of their £19,500 shortfall. Mrs Smith moved into rented accomodation.

Gradually, Mrs Smith improved her financial position, and managed to save £10,000 as a deposit to purchase another property. She made enquiries about obtaining a mortgage, and was refused by her previous mortgage lender. Eventually, using a mortgage broker, she was able to secure a mortgage offer, at a higher interest rate.

Then a letter dropped through her door from the Mortgage Indemnity Guarantee Insurance Company. Mrs Smith was shocked to find that the insurer, having become somehow aware of her improved finances, was demanding the repayment of the £19,500 plus costs that she owed them. Therefore if she'd kindly forward a cheque for £21,323.98, they would be obliged.

Obviously, there had been some mistake, Mrs Smith wrote in a letter to the insurer, they had taken out insurance to cover the shortfall. Soon afterwards she received a reply, pointing out that it was the lender that was insured, she had merely paid the premium, and would she now forward the cheque? failing which, legal proceedings to recover the debt would commence.

This scenario looks unrealistic, like a nightmare, confined only to someones disturbed sleep. In fact it was very real for many people, particularly in the 1980's and early 90's. As the number of people caught in this trap increased, the press reported the problem. Eventually there was a minor public outcry about the injustice of it all. Smart lenders began to reduce the fee, most eventually only imposing it for borrowing over 90% LTV, and some removing the charge completely.