Personal Finance: Plight of the charged brigade

WHEN IS a mortgage indemnity premium (MIP) not a mortgage indemnity premium? This is the question being asked by hundreds of thousands of would-be borrowers, who face a new variant of this hidden charge, levied on those who need to borrow a relatively high proportion of a home's value.

Experts are warning this week that some lenders - including Bradford & Bingley - have found other ways of charging extra for people who want to borrow high amounts.

MIPs typically require the borrower to pay up to pounds 1,500 to indemnify the lender against a fall in house prices should the property be repossessed. However, they offer no protection to borrowers themselves.

Indeed, while lenders use the premium to insure their security against a house price fall, their insurers are still free to pursue borrowers for a chunk of the price drop.

Following a campaign mounted by consumer groups, Halifax said in February last year it would charge no MIP where the loan was 90 per cent or less of a home's value. Other lenders have since followed that lead. But most still insist on a MIP for loans over 90 per cent.

Meanwhile, mortgage experts are now questioning whether consumers are really much better off even though MIPs have been abolished. Ray Boulger, of the specialist mortgage brokers John Charcol, says: "Some lenders are effectively just charging a higher rate instead of the premium. What they give with one hand can be taken away with another."

Last year, Bradford & Bingley, the building society facing a vote to convert it to a bank, scrapped its own version of the MIP for all loans. Instead of demanding a MIP from borrowers, it is imposing risk "loadings" - an extra 0.25 to 0.5 per cent on its rates.

Analysis carried out by MoneyFacts, a guide to investment and mortgage rates, shows that, in some cases, borrowers may end up paying as much for the risk-loading as they did for the MIP.

A borrower taking out a pounds 95,000 mortgage with B&B, on a property worth pounds 100,000, would in the past have paid a MIP at 8.6 per cent of the value of the loan. But that MIP only applied to a fraction of the loan (the amount between pounds 75,000 and pounds 95,000). In this case, the cost would be 8.6 per cent of pounds 20,000, or pounds 1,720.

Now, they will instead pay a "risk loading" of 0.5 per cent, for the first five years, on the whole loan. Rather than paying pounds 1,720, this borrower would pay pounds 2,375 over five years.

Ironically, B&B's changes can mean that when the risk of negative equity is lower, the new system looks even worse. A loan of pounds 85,000 on a pounds 100,000 house would give rise to a MIP costing pounds 500 on the old MIP system. On the new system, an extra 0.25 points will be added to the rates for the whole loan. The cost in extra interest is pounds 1,062.50 - more than double the old amount.

B&B points out that in the past most borrowers, unable to pay a lump sum for the MIP when they bought the house, added it to the loan. This meant the final was higher. It also says the MoneyFacts comparison is flawed because risk loading could also be imposed in the past.

The situation can be even worse for people who borrow more than 90 per cent of the property value. The abolition of MIPs on loans up to 90 per cent creates a nasty quirk which acts as a strong disincentive to borrow more.

A buyer of a pounds 100,000 property would pay very heavily for borrowing pounds 91,000, rather than pounds 90,000. On a five-year fixed-rate deal with the Alliance & Leicester, the borrower not only pays a higher rate (6.25 rather than 5.95 per cent - an extra pounds 1,300) - over the first five years. The borrower also pays a MIP, not just on the extra pounds 1,000 borrowed, but on everything over 75 per cent (pounds 1,200 in this case). The total cost of borrowing that extra pounds 1,000? More than pounds 2,500.