Insurance
Misleading mortgage lenders: thousands caught in insurance trap
Guest Author:
Paloma KubiakNearly half a million homeowners wrongly believed they had to take out insurance through their mortgage lender as a condition of their loan, according to research.
A survey of property owners who bought their mortgage lender’s home insurance found 6% were told it was mandatory, 30% thought it was a condition in order for the money to be released and 24% mistakenly believed that going elsewhere would invalidate their mortgage.
Based on the 11 million mortgages in the UK, research from Gocompare.com suggests that 1.6 million have bought home insurance through their lender and 466,200 households bought it believing it was a condition of the offer.
Worryingly, 12% said they felt under pressure to buy it, while 14% thought it may help with their mortgage application.
Nearly one in ten said they didn’t realise they could be covered elsewhere and others thought their mortgage provider offered the best value cover for their home insurance.
For some, it was more convenient to go through their provider and 72% hadn’t compared prices elsewhere.
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What are the rules?
All mortgage lenders require you to protect the property with adequate buildings insurance, typically against fire, flooding, subsidence and storm damage.
Buildings insurance provides financial protection for the borrower and the lender from damage to the main structure of the home.
While most lenders offer home insurance, you’re not obliged to buy it from them. The practice of compulsory home insurance tied-in mortgage deals was never formally outlawed despite promises to do so in the late 1990s.
Whether you are arranging your first mortgage, re-mortgaging your home, or a long-standing mortgage-holder, you can shop around for your home insurance to find the best deal.
By using a price comparison website, you can make some significant savings – over half of those who switch save up to £62.54 on their buildings and contents insurance.
A lifetime of savings
Ben Wilson from Gocompare.com home insurance said: “We were shocked to find that so many people still think that their mortgage offer is conditional on buying their lender’s home insurance, and that a significant minority are essentially in a mortgage-linked insurance trap – believing that switching away from their lender’s insurance will invalidate their mortgage.
“We were also concerned that a handful of lenders could be exploiting their relationship with their customers by pushing them to buy their insurance cover.
“While buying cover offered by your lender alongside your mortgage may seem an easy option, you might find you’re paying well over the odds. And over the lifetime of a mortgage, failing to regularly shop around for a good deal on home insurance could cost £1,000s in lost savings.”
Wilson added that as well as finding a good value policy, you also need to make sure it covers all the things that are important to you, plus any minimum cover levels your lender may require, and comes with excesses you can afford.