If applicable, this is usually 1.5% of the mortgage.
What is a higher lending charge?
If you have a smaller deposit, you are likely to have a high loan-to-value (LTV) ratio. This is the amount you intend to borrow against the actual property value, and typically expressed as a percentage. As the name suggests, this charge is because by lending over a certain amount, more of the lender’s money is at risk. By charging a higher lending fee they can provide some insurance against their investment. They may use the money to buy a type of insurance policy called a Mortgage Indemnity Guarantee, which provides them with a level of protection if you default on your mortgage.
This charge is usually a percentage of your loan over a certain amount. So, for example if you took out a 90% LTV mortgage on a £200,000 property (borrowing £180,000) and your lender has a 1.5% higher lending charge for all LTVs over 80%, this fee amounts to £300 (1.5% of the £20,000 over the 80% threshold). Some lenders will apply the percentage to the whole loan amount, so always check the calculation method with your lender.
When do I need to pay a higher lending charge?
You will usually need to pay the higher lending charge to your lender when you complete. Your lender may give you the option to pay it upfront or allow you to add it to your mortgage. As always, if possible, it’s worth paying this fee upfront as adding it to your mortgage will mean you end up paying more in the long run through interest.