|
It looks like many homebuyers will continue to fall foul of what's been dubbed a mortgage "scam" for some time to come, despite a government pledge 12 months ago to outlaw the practice.
During the past couple of years, there has been a growing outcry about the fact that some mortgage lenders force customers to take out expensive home insurance as a condition of signing up for their cheapest home loans.
Studies suggest that tying compulsory insurance to mortgage deals costs borrowers millions of pounds a year. Borrowers can end up forking out thousands of pounds more than necessary over their lifetime. Research has shown that insurance arranged through your mortgage provider can cost up to a third more than cover offered by a direct insurer. In fact, the extra cost can end up cancelling out the amount you're saving by taking the cheaper mortgage deal.
In December last year, trade and industry secretary Stephen Byers said legislation to ban compulsory insurance tie-ins would be brought in "at the earliest possible opportunity", probably by the end of 2000. He said: "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."
But 12 months on and there's still no sign of a ban. The rumours are that Mr Byers's bill on consumer rights, which includes the ban, has failed to secure a slot in the Queen's Speech to parliament this coming Wednesday, which would mean the chances of new legislation appearing before the next election are slim, unless an MP can rescue it by pushing it through as a private members' bill.
While many of the biggest lenders have scrapped the practice, there are at least 16 that still insist you buy one or more of their insurance policies if you want one of their lowest rate mortgage deals.
Direct Line has estimated that this so-called "bundling" of insurance with mortgages costs the UK public around £400m a year. "For the average homeowner this can mean needlessly paying around £4,000 more for home insurance over a lifetime," says the company.
Even if you are able to look around for cheaper buildings or contents cover, some lenders charge their customers a fee - typically around £25-£30 - if they have the temerity to arrange their insurance with another company. This tactic is clearly aimed at deterring people from shopping around for their insurance - though the lenders of course deny this, and say the fee covers the cost of checking that a policy you arrange yourself offers adequate cover.
The DTI this week said it could not confirm or deny whether the legislation would be included in the Queen's Speech, but worryingly it appears to be backtracking on its original commitment. A spokeswoman says the situation has changed greatly over the past year in that many banks and building societies have abandoned compulsory insurance. "There are a lot less lenders offering [insurance] tie-ins now, especially among the major players. The consumer now definitely does have a choice," says the DTI.
If it does transpire that the ban has been delayed, or even dropped, the government is likely to come under fire from consumer groups and others. It could be argued it is ridiculous that while travel agents and tour operators are now forbidden from forcing people to buy travel insurance if they want to take advantage of discount holiday deals, mortgage lenders are free to insist that people buy their home insurance as a condition of obtaining their most attractive home loans.
The Consumers' Association - which has described tying compulsory insurance to mortgages as "a scam" - says that sometimes borrowers are forced to buy the lender's buildings or contents cover for several years, so there is no way of knowing at the outset whether the premiums you're being charged over this period will be competitive.
The 16 lenders still offering home loans with compulsory insurance, according to the latest issue of financial data magazine Moneyfacts, are: Clay Cross building society; Clydesdale Bank; Darlington building society; Earl Shilton building society; Leeds & Holbeck building society; Leek United building society; Marsden building society; Newcastle building society; Paragon Mortgages; Principality building society; Progressive building society; Skipton building society; Teachers building society; Universal building society; Wesleyan Home Loans; and West Bromwich building society.
Most of the big lenders have ditched this practice: the Halifax did so seven years ago.
Lenders that have mortgages with compulsory insurance tend to argue this enables them to offer more attractive deals because of the commission they earn. The West Bromwich spoke for many when it said: "We find customers are happy to take up compulsory insurance in exchange for a lower rate. For those customers who don't wish to take up this offer, we offer an equivalent deal without insurance at a slightly higher rate of interest."
Finally, one reason why a ban could still prove problematic is that it would clash with the idea that mortgage payment protection insurance should be made compulsory. This type of insurance, also known as accident, sickness and unemployment (ASU), covers your mortgage payments if you become unemployed or are unable to work, due to an accident or illness.
The government wants more of us to take this out because it is concerned about how many people would pay their mortgage if they lost their job, and the House of Commons social security committee recently indicated it favours forcing lenders to provide payment protection insurance as part of all mortgages.
Ask the right questions and you could save a fortune
When you're choosing a mortgage, be sure to check with the lender or adviser whether their loans come with compulsory insurance.
The government says this is one of the 10 key questions, listed at the end, which everyone considering taking out a mortgage should ask.
If the loan you're particularly interested in does require you to buy the lender's insurance, make sure it is clear exactly how much you would have to pay and how long you would have to take it for. It's advisable to do some homework to find out how the cost of the policy they're offering compares with what you could get by shopping around. Ring round a couple of companies or, if you have access to the internet, try one of the online insurance broking services run by companies such as Screentrade or the AA.
You enter your basic details and the sites will fire back a selection of quotes from leading insurers. Screentrade has a panel of 19 insurers offering buildings and contents insurance, while the AA has 14 insurers on its site.
If there is a big difference between what your lender is charging and what you could get by doing it yourself, you may find this cancels out much of what you would save by taking this mortgage deal.
Screentrade says its own research has suggested that on average, lenders are charging 40% more for their buildings and contents insurance than you would pay by obtaining quotes from several insurers and going for the best one. "You can save yourself hundreds of pounds by shopping around," says a spokesman.
If you want to be completely sure you're getting a mortgage with no hidden costs or catches you may want to consider a so-called "CAT" mortgage offered by Abbey National, Britannia building society, Egg, Halifax, HSBC, Woolwich and Yorkshire building society among others. CAT mortgages must meet a range of government-imposed minimum standards on charges and terms, one of which is that the lender cannot insist you buy its buildings, contents or mortgage payment protection insurance.
Other requirements are that interest must be calculated daily, not annually; with variable rate mortgages, the interest rate cannot be any higher than 2% above the Bank of England base rate; and with fixed, discounted and capped mortgages, there must be no "lock-in" early redemption penalties after the end of the fixed/discounted/capped period.
But the downside of CAT-marked mortgages is that they will often not offer the most competitive rate - meeting all those requirements inevitably means they will tend to be more expensive.
Meanwhile, the advice about shopping around for your home insurance also applies to the millions of borrowers who may have been unwittingly forking out over the odds for years by sticking with their lender's buildings or contents cover. A few minutes on the net or the phone looking at what deals are on offer from other companies could enable people to make significant savings, and in the vast majority of cases you are going to be free to sign up with another insurer.
Research issued by the Department of Trade and Industry last week found that at least one in four people initially sign up with their mortgage lender for insurance. It also revealed just how many people have never got round to changing their insurance provider - less than a third of homeowners (30%) have switched their home insurance in the past five years
The DTI says there are 10 questions everyone taking out a mortgage should ask to help them make an informed choice and avoid hidden traps.
1 How much can I realistically afford to borrow? (Make sure you're clear about what you will have to pay out each month, and don't forget there are other fees and costs involved in buying a home.)
2 How can I tell which mortgage rate is best for me? (What is the rate now and what will happen to it when the special offer period ends?)
3 What is the best type of mortgage for me? (Ask what the jargon means, and whether the mortgage you're being offered will suit your circumstances both now and in the future.)
4 How should I repay it? (You can go for a repayment or an interest-only mortgage, or one that's a mixture of the two.)
5 Can I make lump sum payments to reduce the size of the loan? (Some mortgage deals are a lot more flexible than others.)
6 Are there any redemption penalties? (How much would you have to fork out if you wanted to switch to another lender's better deal?)
7 Does this mortgage come with compulsory insurance?
8 What other charges will I have to pay? (Check if you'll have to pay for mortgage indemnity guarantee insurance - also known as "MIG" fee.)
9 What happens if I can't pay? (Some lenders charge very high fees if you fall behind with your mortgage payments.)
10 What about the small print? (Ask about any terms you're unsure of.)
For full details log on to the special website, the Consumer Gateway.
A case: Joe Hogg
Joe Hogg took out the lender's buildings insurance when he got his mortgage with Bank of Scotland around 15 years ago.
Several years passed and then in 1998, when the bank sent him a renewal quote of £124 for just buildings cover, Mr Hogg, 42, of Edinburgh, decided to shop around to see if he could get a better deal.
He signed up with Tesco Personal Finance after they gave him a quote for buildings and contents cover of £98.80. "I just wish we had done it earlier," he says.
The amount Bank of Scotland charged him had "gradually climbed up" each year, he adds. "We have stuck with Tesco."
|
Latest press releases 
