Some 1.6 million UK home owners have bought home insurance from their lender and many mistakenly believe they cannot switch for a better deal, according to a new survey.
Some 30% or 466,200 households believe their home has to be insured with their mortgage lender as a condition of the loan and 6% were told by their lender that it was a mandatory purchase.
On top of this 24% think switching away from their lender’s insurance will invalidate their mortgage, according to the survey from Gocompare Home Insurance.
Overall it found that 14% of home owners arranged their home insurance through their mortgage lender and 30%, almost half a million home owners, 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 while 12% say they felt under pressure to buy their lender’s home insurance and 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. However, the practice of compulsory home insurance tied-in mortgage deals was never formally outlawed despite promises to do so in the late 1990s.
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.
For example, 14% thought buying their lender’s home insurance might help with their mortgage application, 9% said they didn’t realise they could buy cover elsewhere, 22% said that their lender gave reassurances that the product was good value, 50% think that their mortgage lender provides the best value cover for their home insurance and 49% had opted to do so out of convenience.
The survey also found that 72% hadn’t compared products and prices offered by other providers and 34% of home owners 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.
‘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,’ said Ben Wilson from Gocompare Home Insurance.
‘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,’ he explained.
‘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,’ he pointed out.
‘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,’ he added.
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