Can my bank charge if I get my insurance elsewhere?

Q My partner and I recently took out a mortgage with Northern Rock, and made our own arrangements for property insurance. We have had to pay ?25 as an administrative fee for not using Northern Rock's services.

When challenged, the bank referred us to a clause in the mortgage application, as if this justifies a charge for a non-existent service.

DM

A In the bad old days of packaged mortgages, where the best deals often came with distinctly uncompetitive insurance arrangements, banks and building societies made considerable sums in commission from flogging property insurance to their borrowers. Lenders are still estimated to earn around ?275m a year in commission from these payments - so they're obviously not going to give them up without a fight.

In 1999 the DTI announced it was going to ban the practice but then decided against drawing up legislation as it said the practice was dying out. Since then several lenders have charged an administration fee - usually around ?25, though it can be higher - to borrowers who choose to buy their insurance elsewhere. The argument is that this fee covers the cost of your mortgage lender checking that the cover you arrange elsewhere is adequate.

Some insurers will reimburse you this administration fee, however, including UIA, Tesco , Marks & Spencer and Direct Line.