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Thousands of homeowners could be caught in mortgage insurance trap

31 May 2016

1.6m homeowners have bought home insurance from their lender and many mistakenly believe they cannot switch for a better deal*

A new survey of homeowners who bought their mortgage lender’s home insurance reveals:

  • 30% (466,200 households) believe their home has to be insured with their mortgage lender as a condition of the loan;
  • 6% were told by their lender that it was a mandatory purchase;
  • Nearly a quarter (24%) think switching away from their lender’s insurance will invalidate their mortgage.

According to a new survey** from Gocompare.com Home Insurance, 14% of homeowners arranged their home insurance through their mortgage lender.  30% of these people - almost half a million homeowners – believed that they had to arrange their home insurance through their mortgage lender as a condition of their mortgage deal.

And 24% of borrowers who arranged their insurance with their lender think that switching their insurance to another provider will invalidate their mortgage.  

Worryingly, 12% say they felt under pressure to buy their lender’s home insurance while 6% said they were told by their mortgage provider that they had to.

Protecting a property with adequate buildings insurance – typically against fire, flooding, subsidence and storm damage - is as a requirement made by all mortgage lenders.  Buildings insurance provides financial protection for the borrower (and ultimately the lender) from damage to the main structure of the home.  While most lenders offer home insurance, borrowers are not obliged to buy it for 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, such as Gocompare.com Home Insurance, customers can make some significant savings – over half of those who switch save up to £62.54 on their buildings and contents insurance.*** 

Misled, mistaken and apathetic

When questioned why they had opted to buy their lender’s home insurance, the survey revealed a mixture of misunderstanding, misplaced trust in their mortgage lender and consumer apathy: 

  • 14% thought buying their lender’s home insurance might help with their mortgage application;
  • Nearly one in ten (9%) said they didn’t realise they could buy cover elsewhere;
  • 22% said that their lender gave reassurances that the product was good value;
  • Half think that their mortgage lender provides the best value cover for their home insurance;
  • 49% had opted to do so out of convenience;
  • Most (72%) hadn’t compared products and prices offered by other providers.

Why buying mortgage lenders’ home insurance might be the wrong policy

The survey also revealed that just over a third (34%) of homeowners who arranged cover through their lender didn’t check cover levels and excesses to make sure they were buying the right policy.  According to statistics published earlier this year by the Association of British Insurers, the main reasons for household insurance claims being rejected included the claim value being below the policy excess and the incident not being adequately covered by the policy.

Commenting on the research findings, 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.

“If you have a mortgage on your home, then your lender will require you to protect your property with buildings insurance.  But it’s up to you where you buy that cover from.  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.

“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 that you can afford.” 

Gocompare.com had produced a guide on mortgages and home insurance.

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Notes to editors:

*Based on the fact that there are 11.1m mortgages in the UK, according to the Council of Mortgage Lenders, Feb 2016. Gocompare.com’s research shows that 14% of homeowners arranged their home insurance with their lender. 14% of 11.1m is 1,554,000 households (1.6m). 30% of these households believe their home has to be insured with their mortgage lender as a condition of the loan – 30% of 1.6m is 466,200 households potentially caught in a mortgage insurance trap.

**On 23 March 2016, Bilendi conducted an online survey among 2,000 randomly selected British adults who are Maximiles UK panelists. The margin of error-which measures sampling variability-is +/- 2.2%. The results have been statistically weighted according to the most current education, age, gender and regional data to ensure samples representative of the entire adult population of United Kingdom. Discrepancies in or between totals are due to rounding. Of those surveyed, 14% (276 people) had arranged their home insurance through their bank/building society or other mortgage lender.

***Based on online independent research by Consumer Intelligence during 01 February 2016 to 29 February 2016. 51% of consumers could achieve this saving with Gocompare.com buildings and contents insurance.