The perils of buying home cover from your mortgage lender

If you’re buying a house you’ll need buildings cover, but buying cover from your mortgage lender might not be the cheapest option.

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Mortgage lenders will insist on borrowers taking out buildings cover and will probably do their best to sell it in with the mortgage deal. But don’t automatically take what they offer – there are attractive savings to be had if you shop around.

Whether you’re buying your first home now and thinking about insurance for the first time or you bought buildings cover with your mortgage lender when you took out your mortgage on your current home and it’s now due for renewal, here’s a look at why shopping around is your best option.

What is buildings insurance?

There are two types of home insurance; contents insurance – which covers everything inside the house, from furniture to appliances, and buildings insurance, which covers the structure itself.

Having buildings insurance can protect you against things which could damage the structure of the property, such as subsidence, flood or storm damage, fire or smoke damage, vandalism or burst water pipes.

Buildings cover can also protect you against damage to some of the permanent fixtures and fittings, like your bath, toilets and kitchen units. It may also cover outbuildings like your garage or shed, but will vary from policy to policy and may add more to the premium.

When you buy buildings cover you’ll be asked for an estimate cost of rebuilding the property in the absolute worst case scenario. A chartered surveyor can give you a rebuild value or you can use the Building Cost Information Service’s calculator for free.

When you declare your rebuild value, it’s important to get as accurate a figure as possible because you could end up paying more than you need to for buildings insurance.

For example, if you live in an area where property prices are particularly high, the actual rebuild cost could be much lower than the market value of the property. Use the Building Cost Information Service calculator to get a more accurate value, or speak to a chartered surveyor.

Lenders require buildings insurance so that the asset they’ve extended the loan against is protected, but unless it’s part of the mortgage deal, you’re not obligated to buy it from them.

No obligation

Research from Sainsbury’s Finance found that 1.5million homeowners wrongly believed they were obligated to buy buildings insurance from their mortgage lender, but it’s simply not the case. 

It used to be that anyone taking out a mortgage had to get it from their mortgage lender, until the Office of Fair Trading ruled that consumers should be allowed to shop around.

If you’re taking your first step onto the property ladder it pays to shop around and compare buildings insurance policies to see if there’s a better deal available than the one offered by your mortgage lender.

The mortgage lender will likely want to check the policy to make sure it adequately protects the property and can refuse it if it’s not up to scratch. They may also charge a switching fee if you arrange your own buildings cover, but your new insurer may be willing to cover this for you.

If you’ve already taken out a mortgage and you did buy buildings insurance from your mortgage lender at the time, check when the policy is due for renewal and do a buldings insurance comparison to see if you can get a cheaper quote.

Some mortgage lenders will offer a slight discount on your mortgage rate if you agree to buy your insurance with them. For example, Leeds Building Society offers a discount of 0.24% on the initial rate of at least six of its products if you agree to take its combined buildings and contents insurance policy, HomeCover.

Other ways to save

You may be given the option of paying your home insurance premiums on a monthly or annual basis. Though it might be more manageable to pay the premiums monthly, the insurer may charge you extra for the privilege. Paying for the entire policy up-front will avoid these charges.

Accidental damage cover can increase your premiums by as much as 25%, so think carefully about whether or not you need it.

Agreeing to pay a larger voluntary excess can bring down your premiums, but remember you will have to pay this if you’re forced to make a claim – so it must be realistically affordable.

You may also save money if you buy your buildings and your contents policy from the same provider.  Click here for more ways to save on your home insurance.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.


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