Are you paying over the odds for cover?

Before you sign on the dotted line of your mortgage take a closer look at exactly what is being bundled into the deal.

Before you sign on the dotted line of your mortgage take a closer look at exactly what is being bundled into the deal.

You may find add-ons for life, home and mortgage repayment insurance. No doubt this will follow a chat you had with your provider that went along the lines of: "If anything happens to you, your dependants need to be protected. And, by the way, I'm sure you can see it makes sense to guarantee your mortgage will be repaid if you lose your job - you don't want your house to be repossessed after all."

It would be madness to suggest providers should encourage people not to take out insurance. But, critics say, the current system allows them to persuade people to take their own products, even when there are alternatives elsewhere that are up to 50 per cent cheaper and better suited to their needs.

Some lenders insist borrowers take out insurance, although they may not insist it is their own product. Mortgage Express, which requires every one apart from buy-to-let customers to take out life insurance, falls into this category.

But, critics say, there are far more companies that do not insist people have insurance but can still persuade customers to take out their policies.

Ray Boulger, senior technical manager at independent advisers John Charcoal, says: "Lenders do not insist customers take their life insurance but they can persuade them by being economical with the truth that they have no choice. This is especially the case for people whose circumstances are not straightforward and who are only too pleased to have been offered a mortgage. They may not realise they could have gone elsewhere."

More than 60 per cent of life insurance is taken out with mortgage providers and lenders openly state they want customers to take their own insurance. John Massey, head of mortgages at HSBC, says: "We do not believe in compulsory tie-ins, but obviously we want customers to take our products."

HSBC dropped its policy of mandatory insurance more than six months ago but, leaflets can still be found in Midland Bank, now part of HSBC, which say customers must have life cover. New leaflets say life cover is "preferred and recommended". A spokesperson for Abbey National, which stopped selling tied-in products 10 years ago, says: "We recommend people to have life cover, but it does not have to be with us. If they do buy it with us, it will be our own cover."

But, consumer groups say lenders' own cover can be the expensive option: Abbey National's life cover for a non-smoking couple on a £100,000 repayment mortgage is £40.70. Virgin's is £31.52 and Nationwide's is £30.70.

Compare this to LifeSearch, which continually monitors products and guarantees to find people the cheapest deal on comparable cover. Its price is £19.66 on the same policy.

Managing director, Tom Baigrie, also guarantees he does not cherry pick the lowest cost customers, leaving the rest to fall back on their mortgage lender's insurance. "We are able to find competitive cover for all types of customers, including those who may have serious illnesses," he says.

You may not realise you are paying over the odds says the Consumer's Association. Mick McAteer, senior policy researcher, says: "Tying in products makes it difficult for people to realise how much they are paying and they cannot compare what their lender is offering with other offers as easily."

Another major problem with tied-in or semi tied-in products is that people's choice is reduced. Mr Boulger says: "Some providers only offer life insurance but some customers - without dependants - may be better taking out critical illness cover."

More serious are cases where people have bought insurance and not realised it does not cover them. Self-employed people have been caught in this trap with mortgage repayment insurance, which often does not cover the self-employed. Another pitfall, experts say, is that it can sometimes cover only sickness and accidents and not loss of job.

Bernard Clarke of the Council of Mortgage Lenders says: "It is difficult to say for sure, but it looks like this is the most tied-in type of insurance."

The Government is actively encouraging the industry to get more people to take out insurance to cover repayments. A survey published this week by insurers CGU Direct shows 58 per cent of mortgage holders have payment protection, nearly 10 per cent up on last year.

Tie-ins are about to be addressed by the Government, which is likely to stamp some out in the Consumer Act, expected late this year. This follows consultation between the Department of Trade and Industry and lenders, including new providers like First Active and Kensington, which are pressing for reform. But some of the new lenders say the ban is not likely to go far enough. Tie-ins which are not obligatory but which entice people by offering a free period of cover may not be addressed.

A spokesperson for First Active, the flexible mortgage provider, says: "It is unclear whether they will ban insurance that is free for the first six months or so. The problem with it is that everyone forgets about it and doesn't swap after the free period is over."

Critics say the practice can encourage high premiums. HSBC offers a deal on mortgage repayment insurance, which goes to £5.94 per £100 after six months. Newcastle Building Society offers a rate of £5.90 plus 5 per cent tax after six months. This can be compared to CGU's rate - which is not tied to any particular mortgage - of £4.05 including tax.

Sources close to negotiations with the DTI say home insurance is likely to fall within the Government's ban, but life insurance and mortgage repayment insurance, when offered as a bundle but not made obligatory, may well not.

The best advice, independent experts say, is to check your own conditions carefully and make sure you ask questions about what your options are, as forthcoming regulation may not safeguard you.