For the sake of protecting the lender, you add a few thousand to the mortgage

One of the mortgage industry's most contentious fees, the higher lending charge (HLC), is under fire again.

The charge is often levied on househunters who don't have a substantial deposit and want to buy a property with a high loan-to-value (LTV), typically borrowing more than 90 per cent.

However, it has a single purpose that offers little to the consumer: to cover the cost of the lender's insurance against the risk of that borrower defaulting on the mortgage repayments, as well as the risk of having to repossess and sell on the house.

Several mortgage brokers are now beginning to argue that this charge falls foul of the City regulator's policy of getting companies to "treat customers fairly".

Nick Gardner of broker Chase de Vere Mortgage Management says that while the Financial Services Authority (FSA) has focused this year on the rising cost of administration and mortgage-exit fees, these are "dwarfed by the higher lending charge", which "hardly adheres" to the principle of fair dealing.

"The HLC offers absolutely no benefit or protection to borrowers, yet the cost of it lies with them, which is scandalous," he says. "Even once the lender is insured, the borrower can still be chased for the difference if house prices have gone down when a property is repossessed and the lender does not recoup its losses in full."

Some lenders apply the HLC even if the borrower's parents have underwritten the mortgage repayments and eliminated the risk of any default.

"The Halifax will still levy the HLC when the high lending risk has been mitigated [by parents]," says Melanie Bien of broker Savills Private Finance. "Nat-West will waive it if a guarantor is in place."

And given that it can work out better value to borrow more money from a lender that doesn't levy an HLC, instead of less from one that does, consumers are often left feeling confused.

Ray Boulger of broker John Charcol claims there is little point taking a maximum 97 per cent mortgage from the Halifax or Abbey and then adding the cost of the HLC and the arrangement fee. "By the time you have done this, you may as well have borrowed 99 per cent," he says.

"So rather than scraping together the 3 per cent deposit, it can be better value to borrow 100 per cent from a lender that does not charge the HLC. At least this way, you get the money that you have to repay."

The FSA says the charge does not fall under its definition of "unfair contract terms".

"In effect, HLCs are entrance fees [to a mortgage]. So although they may be high, the customer knows what they are paying," a spokesman explains. "Also, not all lenders charge them, so consumers are still protected by the opportunity to shop around.

However, the FSA can make recommendations to lenders even where issues fall outside its "unfair contract terms", and the spokesman does not rule out looking at HLCs in the future.

Research from financial analyst Moneyfacts shows that three-quarters of lenders apply HLCs. They are charged as a proportion of the loan but the way they are calculated is notoriously complex and can easily trip up those entering the property market for the first time.

Although the threshold that triggers the HLC is typically set at 90 per cent LTV, it is applied - at varying percentages - on the difference between 75 per cent LTV and the loan actually taken.

This percentage will range from 7.5 to 12 per cent, depending on how much you want to borrow. For example, take out a 100 per cent mortgage with either Royal Bank of Scotland or Bank of Scotland, and you would be charged 12 per cent on the difference between 75 and 100 per cent LTV. This amounts to 3 per cent of the entire loan and translates into thousands of pounds.

For example, a first-time buyer borrowing 100 per cent for a £100,000 property (on a 25-year repayment mortgage priced at 5 per cent) would pay £3,000 with either lender.

Mr Gardner at Chase de Vere says people should resist the temptation to add the HLC to the loan instead of paying it upfront. "This can seem appealing to first-time buyers," he explains, "but it will cost considerably more in the long run."

If the £3,000 HLC in the above example was added to the loan, it would increase mortgage repayments by £17.54 a month and end up costing a total of £5,262 over the 25-year term, according to research from Moneyfacts.

Some lenders have no HLCs at all, including Bradford & Bing-ley, HSBC, Northern Rock and Nationwide building society.

"It's true that borrowers have a choice, but many first-time buyers go straight to big, trusted names like the Halifax without realising it," says Ms Bien. "And these are often the people who are least able to pay."

No fee, please...

Chris Atkinson, 25, and his wife Marie, 26, went out of their way to avoid the HLC.

They wanted to keep upfront charges to a minimum when they bought their two-bed home in Hersham, Surrey, for £195,000 in September last year. "We were borrowing 90 per cent LTV and had heard about the fee," says Chris, a civil servant. "So we opted for Nationwide as we knew it didn't charge one."

The couple, who were saving for their wedding at the time, say the HLC could trip up first-time buyers who have not done their research. "It is easily overlooked," says Chris. "I have only just learnt the proper name for it."