MORTGAGE INDEMNITY

But what it does is give the mortgage lender some added security against the possibility of you defaulting on the mortgage payments.

It should never get charged if you are borrowing less than 75% of the properties value. For example, house purchase £100,000 deposit £25,000, mortgage £75,000.

In the above example let’s say you move in, and on day one have a really bad accident and are unable to work again. You have no sick pay or insurance protection in place so are immediately unable to make the mortgage payments.

The lenders going to stand a couple of missed payments but after a period of time the letters are going to turn nasty, with court proceedings etc. After 6 months they are going to be looking to repossess.

This will involve court costs and solicitors fees to the lender plus all the admin costs. The judge finally says you’ve got to be evicted which will incur bailiff costs etc. When they finally get you out of the property they find you have smashed the kitchen and bathroom up in temper and pinched all the light fittings.

The house is a wreck so they sell it to a builder for the knock down price of £83,000 take their £75,000 back plus £8,000 for costs. The mortgage lender gets all it’s money back you lose your £25,000 deposit.

If you re-run the above scenario but with a mortgage which is for 95% i.e. £95,000 with only a £5,000 deposit, the mortgage lender is looking at potential big losses.

So what are the options open to Mortgage lenders? Well first of all, only lend to people with a 25% deposit or more. Great idea from a risk point of view but they wouldn’t have many customers and the housing market would crash overnight, as the chances of First time buyers finding a 25% deposit would be few and far between. Secondly take out some sort of Insurance against the fact that customers might default on the loan.

This is where the High Lending or MIG comes in. The lenders charge you a relatively small one off payment and take out an Indemnity policy with an Insurance Company to cover this. Some lenders charge on any loan above 75% some don’t charge unless it’s over 90%.

Let’s say you borrow £95,000 on a £100,000 purchase and the lender charges 1% on loans above 90%. You will therefore pay £950.

Now the lender makes you pay the Insurance premium but it’s for their benefit, (Remember the golden rule, they’ve got the gold so they make the rules) and the Insurance Company still has the right to come after you for the money also, if you default.

This may not seem terribly fair but remember without it the lenders could not take the risk and therefore would not give you the mortgage you require to buy your dream home.

If at all possible ask a mortgage broker to let you know which lenders charge, how much and at what percentage level it starts at.

Paying the MIG upfront is better, because if you add it to the loan it will cost you considerably more over the period of the mortgage. Though if you are looking to reduce the set up cost's, some lenders will allow it to be added to the loan.

If you'd like to talk to a mortgage adviser about MIG or any other mortgage issue, please complete the relevant enquiry form.

Mortgage Enquiry Form

Remortgage Enquiry Form