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Mortgage Indemnity Guarantee (MIG)

Most lenders have a maximum loan-to-value (LTV) ratio for their products of around 90%. What this means is that to finance your property purchase, you can obtain a loan for up to 90% of the value of the property. If the property is worth £500,000, a 90% LTV would allow for a £450,000 mortgage. The other £50,000 must be provided by the borrower as a deposit, usually coming from savings built up over time or with the help of parents, relations and close friends.

LOAN-TO-VALUE (LTV) DILEMNA

The rampant housing market of the mid-late 1990s and early-mid 2000s has seen property prices soar. This has meant that as high prices have increased, the deposit required for a mortgage has increased. This has had two consequences. Firstly, it has become increasingly difficult for individuals, particularly first-time homebuyers, to get onto the ‘housing ladder’ because the deposit now needed to secure a mortgage makes it very difficult to purchase a property. This has led to the second knock-on effect; mortgage lenders now cater to this market by providing loans with higher LTVs than previously offered.

This has seen the market introduce mortgages that not only offer LTVs of 100%, but also loans in excess of the property value. This sort of loan is potentially very damaging to mortgage lenders because it means that the property acting as security may not be worth enough to recoup a ‘bad’ mortgage.

MORTGAGE INDEMNITY GUARANTEES (MIGs)

If a borrower defaults on repayments and builds up substantial arrears, the mortgage provider may have no alternative but to repossess the property and recoup their losses. However there are some circumstances when the sale of the property does not raise the necessary funds to repay the mortgage.

This occurred in the early 1990s when house prices fell sharply. An individual may have borrowed £250,000 to purchase a property worth, say £270,000. If the house price fell, to perhaps £220,000, then the mortgage would be greater than the equity held in the house. This is known as negative equity, and it means that the loan is now no longer fully secured.

A Mortgage Indemnity Guarantee is insurance that provides the lender with protection against this problem. A MIG insures the lender against losses should the house be repossessed and sold to clear debts, and the property is not enough to cover the outstanding debt. These days they are only required on mortgages that have a high LTV. Although MIGs benefit the lender, the borrower is usually passed the bill – if you want to take out a loan with a high LTV, this is the price you have to pay.

The accepted threshold before a MIG is required is around 90% LTV, but this varies from lender to lender, so it is worth checking the MIG situation with your mortgage provider before agreeing to any loan. Some lenders have now completely removed MIG from their financial product range, even though they may still be prepared to offer high LTV mortgages. This is most likely because of the adoption of CAT Standards These government standards, although not required (and arguably not particularly helpful) have been adopted by many mortgage providers. One of the specifications for all CAT mortgages is that MIGs are not required as part of the mortgage product.

The MIG premium itself is a one-off payment that is based on the value of the property that is being financed and the loan-to-value (LTV) ratio. This MIG cost can be added to the value borrowed, however you should note that you will be charged interest on the MIG and other fees rolled into your repayments, as well as the accrual of interest on capital borrowed to pay for your house. This does mean that these fees, on a 25 year mortgage, can end up costing substantially more than if they are paid up-front – potentially over double the initially quoted price. That said, with the number of legal, arrangement and property fees involved in a house purchase, it is very appealing to roll the MIG fee into the mortgage.

HOW MUCH DOES A MORTGAGE INDEMNITY GUARANTEE COST?

A major point to note is that the MIG does not cover the whole value of the house. In almost every circumstance where a house is repossessed, the home can always be sold to cover the bulk of the mortgage. This means that a Mortgage Indemnity Guarantee need only cover the balance between house resale value and how much you have borrowed.

This means that a MIG usually insures the part of the mortgage that exceeds a set ‘securitised’ level, usually around 75% LTV. This means that the two most significant factors when calculating a MIG premium will be the overall value of the property and your LTV.

A rough estimate of the MIG premium you will have to pay can be calculated in a pretty straightforward manner. The first thing to do is work out your LTV, and deduct 75%. Say your LTV is 85% then this figure would be 10%. The next step is to multiply through by the value of the property. Using our example, and assuming that the property is valued at £100,000, this figure works out at £10,000. This is, in essence, the amount being insured by the MIG.

Once you have worked this out, you need to translate this figure into a premium. The higher your LTV, the higher your insurance rate, as the risk of default is assumed to get higher. The insurer calculates that the higher the LTV, the greater the chance that a property sale will not cover the loan, so the greater the premium.

To get your premium then, multiply your figure through by 4% if your LTV is between 75% and 90%. If your LTV is 90% - 95% then multiply by 6%, if your LTV is greater than 95% then you should multiply your figure through by 8%.

To help give you an idea of the best types of interest rates you can expect on high-LTV mortgages in the UK, take a look at our 100% LTV Mortgage Tables.

Before deciding to opt for a high LTV mortgage, we suggest you gain some in-depth professional advice from an Independent Financial Adviser (IFA). Please fill out our brief mortgage enquiry form and we will have an IFA contact you within 24 hours.