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Indemnity Guarantee
The rules of most societies require additional security to be taken for any loan that exceeds a stated proportion, often 80% of the valuation of the property. The additional security usually takes the form of an independent guarantee from an insurance company indemnifying the society against loss in respect of the excess lending over 80%.
The cost of this indemnity has to be met by the borrower, but it is quite modest and is in the form of a single premium, the amount of which can usually be added to the mortgage amount so that it, too, is being borrowed from the society.
The single premium is commonly at a rate between 3% and 4.5% of the excess borrowing. So if the society is lending £18,000, being 90% of the valuation of £20,000, then the excess lending is 10% of £20,000, which is £2,000. Single premium at 3.5% would be £70.
Mortgage period
Building society mortgages are normally arranged in such a way that they will be repaid over an agreed period of years. It is sometimes possible to arrange for a 30-year mortgage but 25 years is more normal. A shorter term may be requested by the borrower, but the shorter the period of years the larger the monthly outgoing will be. In times of inflation it is good business to borrow money over a long period and to repay it from devalued pounds out of a continually increasing money income.
Mortgages Example
Rupert and Mary Stott earn gross incomes of £6,000 and £4,000 respectively. They have £4,500 saved up in a building society share account and wish to buy a purpose-built flat for £23,000. The society's valuer places a figure of £22,000 only on it.
Maximum loan restricted to 90% of valuation = £19,800 Maximum loan restricted by income: 21/2 x £6,000 = £15,000
1 x £4,000 = 4,000 £19,000
Thus £19,000 is the maximum loan. This will require the couple to find £4,000 from their own resources, plus a few hundred for their expenses. Although they have more than £4,000 in their... see: Mortgages Example