Insurance tie-in with mortgages to be banned

The department of trade and industry said yesterday that it is to outlaw compulsory insurance tie-ins where homebuyers are forced to buy expensive buildings and contents insurance to qualify for special rate mortgages.

Trade and industry secretary Stephen Byers said that legislation to ban the practice would be brought in "at the earliest possible opportunity", probably by the end of next year.

"It is important for consumers to have a genuine choice and that they are not forced into accepting an insurance policy which may not be the best deal available to them," said Mr Byers.

The insurer Direct Line claims that banks and building societies pocket around £400m a year in commission by selling buildings and contents insurance which allegedly costs the average homeowner £50 a year more than buying direct.

Group chief executive Ian Chippendale said: "This is brilliant news. For too long banks and building societies have been able to exploit their position to coerce customers into accepting the insurance they offer as part of the promise of a mortgage deal."

The move is the latest step in a joint DTI and treasury drive to clean up the mortgage industry, and follows a summit meeting at the DTI earlier this week between Mr Byers and new entrants to the mortgage market, including Virgin and Standard Life Bank.

An informal vote at the meeting agreed that compulsory tie-in insurance deals should be abolished.

Mr Byers is to meet the big mortgage lenders again early next year; a package of reforms is expected soon after. Under consideration is an end to the practice of calculating mortgage interest on an annual rather than daily basis and banning redemption penalties that last longer than the length of the fixed rate or discount deal

More than 30 lenders have tied-in mortgage and insurance packages, including Barclays bank, and the Leeds & Holbeck, Norwich & Peterborough, and Scarborough building societies.

Norwich & Peterborough yesterday warned that, if it was forced to withdraw its insurance package, customers would face higher mortgage rates when taking out its fixed and discount mortgage loans. The society now offers a two percentage point discount off the mortgage rate if a customer buys its insurance, but reduces this to 0.85 if the insurance is not taken out.

"The insurance element enables us to offer a much more attractive deal because of the commission we earn," a spokeswoman said.

Scarborough's chief executive, John Carrier, said: "If compulsory products are banned, it will remove an element of choice for consumers. We make it quite clear what the deal is, and the insurance premium compares well against competitors."

But Abbey National welcomed the prospect of a ban. A spokesman said: "We fully support moves to break the compulsory link between mortgages and home insurance. We started moving away from this practice some years ago, and stopped it altogether in April 1998."

A ban might be difficult to enforce. The monopolies and mergers commission last year banned high street travel agents from forcing holidaymakers to buy insurance as part of a holiday package, but direct insurers complain that buyers still believe they have to take out the agent's insurance.