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Is buying home insurance from your mortgage provider a rip-off?

Model house held in someone's handsHomeowners taking out buildings insurance alongside their mortgage could be paying over the odds. Here’s why.

If you’re buying a house then you’re probably taking out a mortgage and as part of the deal your lender will insist that you protect your new home with an insurance policy.

Many banks or building societies, will offer you their own home insurance policy when you take out a mortgage.

Although this might seem like the simplest option at the time, it may not always be the best deal, as one Confused.com customer found out.

Do you have to buy insurance from your mortgage provider?

Your mortgage provider will insist you have buildings cover, but it is your choice where you buy it from. You do not have to take it out with your mortgage lender and may find cheaper policies elsewhere.

According to the Post Office, mortgage borrowers lose a combined £600m every year, because they buy their mortgage lender's insurance products instead of shopping around for a better deal. It might be easier but it’s unlikely to be cheaper.

One consumer who got stung by not shopping around, Sheila Daily, wrote to Confused.com’s Cash Clinic expert, Chris Torney, to ask if she was entitled to compensation from her mortgage provider after she discovered she’d been overpaying for 20 years.

She said: “When we took out our mortgage more than 20 years ago, one of the conditions was to take out buildings insurance with the bank at £45 a month.

“I have recently paid off the mortgage and changed my insurance through Confused.com: my combined buildings and content cover now amounts to £15 monthly.

“This constitutes an overall monthly saving of over £30 monthly. Do I have a case for compensation with Halifax?”

It’s your job to shop around

Unfortunately for this homeowner, and anyone else in this situation, compensation is a very unlikely option, despite having potentially paid out more than necessary for a home insurance policy for the past two decades.

Years ago anyone taking out a mortgage had to buy insurance from their provider but this was outlawed 15 years ago by the Office of Fair Trading, which said consumers are free to shop around for their buildings insurance.

In Mrs Daily’s case, Torney said: “Unfortunately companies are under no obligation to compensate customers simply for offering poor value.”

Alex Higgs, Confused.com's home insurance commercial analyst explains why many providers offer such a poor deal on buildings cover.

“Insurance sold at the point of sale will not always be the best option for a customer. With just the one option to choose from, the insurance premium doesn’t need to be priced as competitively as if it were sold in an open marketplace, and as such, the customer could end up paying more than they need to.

“It might be easier to take out your buildings insurance through your mortgage provider but shopping around using only 10 minutes of your time can potentially save you money that could be better spent in your home.”

How can I get insurance elsewhere?

The best thing to do is to shop around and find a cheaper deal. Price comparison sites compare a range of providers for you and you only need to provide your details once.

Once you have a quote, you could go to your mortgage provider and see if they can match it. If they can’t you can take out the cheaper policy and cancel your mortgage provider’s policy.

All your mortgage provider will need is a certificate of insurance from your new provider so they can be satisfied that your property is protected. But be aware that some providers may charge you an admin fee to switch from their insurance policy to another.




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Lois Avery

Lois Avery

Lois joined Confused.com in 2010 after working for Dyson and as a local newspaper reporter in Wiltshire. After a year writing financial journalism at Confused.com, Lois won the 2011 'most promising newcomer' at the BIBA journalist of the year awards.

Read more from Lois



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