If you borrow a high proportion of your property’s value typically 90 per cent or above the lender may charge a higher-lending fee.
It will use part of this to pay for an insurance policy to cover it if you can’t keep up your repayments. The rest is profit!
This can also be called an indemnity guarantee, additional security fee or mortgage advance premium.
Here’s How it Works
If you get into financial difficulties and fall badly behind with your mortgage payments, your lender can repossess your property.
It will then sell it to get back the money it leant you. If it doesn’t make enough to cover what you owe, the insurance will make up the difference.
How Much Will The Fee Be?
This depends on the value of your property and how much you want to borrow, but for someone borrowing £100,000, about £1,500 is typical.
For more on this, read How higher-lending fees are worked out.
More Bad News
You might think it’s a good thing that your lender is insured in case you get into difficulties. It is. For the lender but not for you.
You may pay for the policy, but you won’t benefit.
Even if the lender makes use of the policy, you will still be liable for the difference between the amount you owe and the amount the lender sold your property for.
The Good News
There are easy ways to avoid paying this fee. For more on this, read How to avoid paying a higher-lending fee.
To find out more about early redemption penalties, read Early redemption penalties explained and How to avoid paying an early redemption penalty.