Homebuyers are wrongly being told they can only get a mortgage if they buy life insurance or income protection cover.
Research for Money Mail reveals more than three in ten borrowers have been told life insurance is a legal requirement, while a further third say they were advised that they couldn’t get a loan without it.
More than half of those who were sold income protection insurance alongside their mortgage were also told it was mandatory.
Rip-off: Research reveals more than three in ten borrowers have been told life insurance is a legal requirement
Many homebuyers are baffled by the array of insurance policies they are offered when taking out a home loan.
As well as life insurance, which pays out a lump sum on your death, you may be offered income protection or critical illness cover.
Income protection insurance should cover your mortgage repayments if you cannot work because of sickness. Critical illness cover, meanwhile, pays out a lump sum if you are diagnosed with one of a specified list of serious illnesses.
For many families, taking out life insurance is a sensible decision, as it provides your loved ones with piece of mind that the mortgage will be covered should you die.
But if you do not have children, you may find a policy that covers your income in the event you are unable to work more suitable.
Kevin Carr, chief executive of Protection Review, says: ‘These days, people don’t tend to die until they are much older, whereas they are more likely to be off work. Yet only 100,000 people a year buy income protection, while one million buy life insurance.’
None of these insurance policies is compulsory, however. Buildings insurance is the only cover typically required as a condition of obtaining a mortgage.
It is also vital that you do not accept the first deal you are offered without checking if you can get a better price elsewhere.
Research by comparison website ActiveQuote.com reveals that many people fail to do this. According to its survey of 2,000 UK adults, more than a third (35 per cent) say they bought life insurance from their mortgage provider or financial adviser.
A further 8 per centwere unaware that they could even shop around for a cheaper deal (12 per centin the case of income protection).
Rod Jones, head of partnerships at ActiveQuote.com, says: ‘Our research highlights that there is still a lot of misinformation about what is required to get a mortgage, with one in five admitting they don’t understand what life and income protection insurance covers.
‘While it is advisable to protect yourself when taking on a home loan, it is not a legal requirement.
‘Taking out a mortgage is a stressful process and, if you are being advised that you have to take something, you tend just to agree. A lot of the money brokers make is from added products.’
Anthony Emmerson, director of Mayfair-based Trinity Financial, says brokers dealing in lower-value loans could earn far more from selling life insurance policies than from the mortgage itself.
He says: ‘If the average house price is £200,000, the broker is going to earn three or four times as much commission on the insurance as they are on the mortgage. That might be a driver for them to say it was compulsory, but it would be mis-selling.’
Mike Begg, a former banker who now runs claims firm Beat The Banks, says: ‘Most brokers, as well as banks, are tied to a single insurance provider and charge more than the base cost of the policy — known as the business partner rate. It could mean a mark-up of as much as 40 per cent.’
When marketing executive Bethan Rees, 27, wanted to get a mortgage on a two-bedroom flat in Cardiff, she turned to her bank, Barclays.
She says: ‘I spoke to an adviser and understood that to complete the mortgage, one of the requirements would be to take out life insurance. They said we could shop around, or they had a recommended product.’
She and her partner, Peter, 26, agreed to take the £120,000 joint life and critical illness cover with Legal & General offered by the bank at £32 a month.
They have since discovered on comparison site Confused.com that, had they gone direct to Legal & General, it would have cost just £27 — nearly 16 per centless or a saving of £1,500 over the 25-year loan.
Ms Rees says: ‘As we were first-time buyers, everything was new to us, so, for the sake of ease, we opted for the policy provider the bank recommended. In hindsight, we would have preferred to shop around, but there is so much to consider when buying a house.’
A Barclays spokesperson says: ‘As a responsible lender, all customers are informed that when arranging a mortgage, life and critical illness protection is not a condition of a Barclays mortgage. The optional nature of mortgage protection is confirmed in documentation provided to customers.
‘After reviewing this case, we are satisfied that the protection sale aligns with our expected standards.’
Mr Carr says: ‘When people are taking on a mortgage, they have got so much on their plate. They really need to revisit it a few months later when they are settled in.’
Never pick a policy purely based on price without checking you have the level of cover you need.