There are hidden charges, confusing jargon and penalties that are often forgotten about or ignored by borrowers, but these can be very costly further down the line.
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Higher Lending Charge (HLC)
With house prices still defying gravity, it is becoming increasingly difficult to put a substantial deposit down when buying a house. This often leaves borrowers open to a higher lending charge (HLC).
HLCs are usually imposed by mortgage lenders to provide them with insurance should the borrower default on payments when a high loan-to-value (LTV) is taken out.
The LTV is the amount of mortgage borrowed against the property value, and is expressed as a percentage of the property’s value. For example, if you are buying a house for £200,000 and borrow £196,000 you have a 95 per cent LTV.
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Simply, the higher the LTV the more likely you are to be subjected to a HLC and the higher the cost of the charge.
HLCs are normally calculated as a percentage of the portion of the loan in excess of 75 per cent of the property value.
For example, on your house worth £200,000, you will pay a HLC on the amount between £150,000 the 75 per cent threshold and the amount you have borrowed, which in this case is £196,000. This means that you will be paying a HLC on £46,000.
Now, depending on the lender determines exactly how much this charge is as their rates differ, but they can be as low as 5.5 per cent which would therefore cost you £2,530.
There is however, a way round this with many lenders now offering products with no HLCs, so remember to ask your lender before you decide to choose a particular mortgage.
Early Repayment Charge (ERC)
An Early Repayment Charge is simply that, a charge imposed by your lender should you choose to pay back your loan early or switch to another deal.
An ERC can be calculated in a number of ways, such as a number of months interest, a percentage of the amount originally borrowed, a percentage of the outstanding balance or a percentage of the sum repaid.
You can find out from your lender how the ERC is calculated and how much, in pounds, it will be, but make sure you think far into the future. Would you be able to afford the ERC should you be forced to pay the loan back early due to redundancy or ill-health?
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Throwing caution to the wind
Mortgage Payment Protection Insurance (MPPI) differs slightly to the other charges mentioned, as it does serve to benefit you as the borrower. However, a common pitfall is that people rely on it too heavily and in these cases in can become very costly.
It can be very easy to fall behind on mortgage repayments, and if it then becomes difficult to catch up, you run the risk of losing your home. MPPI covers your mortgage payments for a period of time if you suffer an accident, lose your job or are sick.
As with any insurance it is advisable that you shop around, and make sure you know exactly what cover you are purchasing.
Most MPPI policies have limitations. According to experts, most dont allow you to make a claim until 60 days after the policy was taken out and payments are usually limited to around £1,000 – £1,500 per month.
One common pitfall with MPPI is that borrowers dont realise that there are some circumstances where they arent covered, for example, impending unemployment that you were aware of when you took out the insurance, or sickness claims caused by certain pre-existing medical conditions.
However, when taking out a mortgage this type of insurance is beneficial. Although, it is advisable for any homeowner to have the equivalent of at least three months salary stashed away in a savings account to cover any unexpected costs.
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