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Insurance 'tie ins" / bundling

What are they?

Aren't they illegal?

How to avoid being conned

Possible benefits of bundling

What are they?

The mortgage market is very competitive. Mortgage lenders try to attract new business with great sounding cut-price interest rates.

These will be "loss leaders" - much as supermarkets have special offers. They won't make money on the discouted goods on offer, but hope to get you to buy other stuff while you're in their shop.

A notable way the way the mortgage lenders do this is to get you to buy their insurance policies. This is known as "bundling".

Sometimes they'll say that taking their insurance is compulsory ie it'll be a condition of your taking their cut-price mortgage.

To make sure you go with their policy, they'll levy a fee - often £25 - if you insure elsewhere. This practice is known as a "tie in".

Tied in insurance policies are highly unlikely to be the best buy, particularly if the interest rate on the mortgage being dangled in front of you looks like a real bargain.

In fact there's a theory that the cheap looking mortgages are a deliberate way of luring people in to the insurance tie ins which is where the mortgage lender make the real money.

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Aren't tie ins illegal?

No they're not. Every so often the government make noises about what a bad practice it is and how they're going to do something to protect the British consumer. But they never seem to quite get round to it.

Meanwhile there's a myth that keeps doing the rounds that tie ins are illegal. Not true.

Funnily enough it seems that the people happy to spread this myth are the mortgage lenders and their agents.

This would have nothing to do with making their customers think they don't have to check up on what's being offered.

If you need clarification call the Financial Services Authority helpline on 0845 606 1234.

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How to avoid being conned

The main thing is to shop around.

Don't worry too much about the penalty fee the lender may charge if you insure elsewhere. You'll more than make up for it eventually in saved premium costs.

Some insurers may even pay the penalty for you if you take out their insurance instead of your mortgage lenders.

If you arrange insurance independently of your mortgage lender differences of up to �150 a year on Buildings and Contents Insurance are commonplace. That's �3,750 over a 25 year mortgage term.

If that money was going into your pension fund instead, the difference after interest could amount to £10,000.

The lenders know that most people aren't bothered and will just take their insurance policies without shopping around.

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Benefits of tie ins / Bundling

Bear in mind that some cheaper insurance policies may not give you the same level of cover as the more expensive ones.

There's also the idea that it's good to keep everything under one roof. But then again, given the nature of large organisations, where departments seem to fight each other rather than co-operate, perhaps not...

Tied in insurance policies may be useful if you're suffering from "postcode apartheid" (ie your premiums are higher because your home is in a "riskier" area).

Some lenders offer "block policies", meaning all their borrowers pay the same regardless of where they live.

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