Avoiding the pitfalls

Half of all mortgage borrowers arrange their home insurance through their mortgage provider - it's so easy, why bother spending time and effort looking elsewhere, when the chances are you may save yourself just a few measly pounds?

It may be that the best household insurance policy is the one offered to you by your mortgage lender. They usually offer you a policy either separately from your mortgage or incorporated into the cost of the loan. There are some genuinely good deals on offer from mortgage providers and many people may prefer not having to budget for this insurance separately. However, you should be aware of some of the potential pitfalls…

Some companies capitalise on the fact that many customers are too lazy or ill informed to change supplier or hunt around for a better deal. With bank insurance premiums an average of 31 percent higher than the most competitively priced policies, the cost of this convenience could be as much as £3,500 over the life of your mortgage.

However, to make matters worse, some lenders go to great lengths to ensure that borrowers have little choice but to choose the household insurance policy that is on offer. One in four lenders imposes an administration fee if a borrower wishes to arrange insurance elsewhere, while a fifth of lenders refuse to make certain key pieces of information available to other insurers, preventing them from being able to offer an accurate quote. Other lenders refuse to allow access to their best lending rates unless a borrower takes out their insurance. The reason? Simple - lenders are reckoned to earn around £275 million each year in commission on these policies from insurance companies. Why not shop around and make sure that you keep just a little bit of this extortionate sum of money in your own pocket?

Household insurance offered by specialist providers is often cheaper than that offered by mortgage lenders. Remember that every insurer specialises in a certain group of customers or type of insurance. They will all insure most people for most things, but the best-priced premiums are to be found when your needs fit the bill of the insurers preferred customer. It can be a good idea to ask them what this is in their case.

Remember that there can be major differences between policies - you may not be comparing like with like.

Some policies, usually referred to as indemnity policies, take into account the usage and wear and tear of your things. This sort of policy will usually require you to know the approximate date on which an item was purchased so that the insurers can calculate a rough value on the date it was stolen or damaged. If you take this type of policy, be aware that to replace your all your things, you are either going to need a very successful second-hand shopping trip, or else stump up quite a considerable amount of cash yourself in order to buy new.

Many policies offer the more straightforward new-for-old arrangement, whereby your possessions are replaced with a brand new, up to date equivalent of the original item. These are generally more expensive than indemnity policies, but many people find that the extra benefits are worth it, especially if they ever come to make a claim.

It's all in the small print, so read it! Many people get caught out by not reading the details and therefore not being aware of some of the clauses in the contract that mean they are not covered for quite what they think they are.