Tied in by the letter of the law: Some borrowers are being forced into insurance through loopholes, says Vivien Goldsmith

NATIONWIDE Building Society is forcing home buyers who borrow more than 95 per cent of the purchase price to take out its contents insurance.

Building societies have a code of conduct that prohibits them from insisting that borrowers take out insurance as a condition of granting a mortgage.

It does, however, allow them to charge different rates of interest depending on the insurances taken up, which permits societies to insist on building, contents or redundancy insurance on special deals such as fixed-rate loans or discounted mortgages.

But Nationwide is insisting on contents insurance for standard variable-rate mortgages. 'We are satisfied that it is legal because we do not insist on it for normal lending. We consider normal lending to be up to 95 per cent,' a spokeswoman said.

A spokesman for the Building Societies Commission, which regulates societies, said: 'We think that the Nationwide is within the letter of the law - though I can make no comment on the spirit of the law - because they are not denying a mortgage; you can still have a 90 per cent mortgage, no problem; the letter of the code allows this to happen.'

The code of conduct was introduced in 1989 to try to head off the threat of legislation. But the Courts & Legal Services Act 1990 does include a clause forbidding 'tying-in', which would apply to all mortgage lenders, not just building societies. However, sections 104-107, the relevant part of the Act, have never been implemented.

'It is up to the Department of Trade and Industry,' a spokesman for the Lord Chancellor's office said.

Jane Downey is a single parent whose partner has died. She is about to make the leap into home ownership using a scheme that allows her to buy half a house while a housing association buys the other half. This DIY shared ownership scheme is designed for those who have little spare cash behind them.

Ms Downey, a law lecturer at Newnham Community College, was outraged when she was asked for pounds 400 for contents insurance.

'I really don't see that it's got anything to do with them whether I have contents insurance or not,' she said. 'I could get contents insurance for pounds 250 elsewhere.

'And they didn't tell me about this clause until after I had already paid pounds 330 for the survey.'

She approached the Building Societies Ombudsman, but the complaint could not be taken up because she does not already have a Nationwide mortgage.

The ombudsman, Stephen Edell, made it clear that he was unhappy that these tying-in arrangements were not within his remit - before the mortgage was accepted there was no customer relationship, and afterwards the applicant was deemed to have accepted the conditions of the mortgage.

'Unfortunately these things are outside our jurisdiction,' Mr Edell said.

The Office of Fair Trading has taken an interest in protecting consumers from enforced insurance. In 1991, when Sir Gordon Borrie, the then director-general of the OFT, welcomed the Courts and Legal Services Act, he said that he had been considering a reference to the Monopolies and Mergers Commission over these practices.

Ms Downey is planning to move to a three-bedroomed house in Bow, London, with her two children aged 10 and four. St George's Housing Association, which operates in north and east London and the south of England, is paying pounds 42,500 for half of the house and Ms Downey is getting a 100 per cent loan for the other half. She will then pay rent to the housing association and mortgage repayments to Nationwide.

But Angela Stone, marketing manager at St Georges's pointed out that under the scheme the mortgage lender has security over the housing association's portion of the property as well: 'Although they are lending 100 per cent of the purchaser's half, they have more security.'

She said that about 50 buyers on the shared ownership scheme had been referred to Nationwide. But the association was not told of the new insistence on contents insurance, which was brought in at the end of last year. The association takes care of the building's insurance.

'I'm a bit upset we were not told. But there are few lenders willing to do this scheme, so they are in a strong position,' Ms Stone said.

Abbey National, which is now regulated under the Banking Act, does grant loans under the scheme. It requires buyers to take out contents insurance only with a first-time buyer's fixed-rate deal. Its charge for contents insurance for a three-bedroomed house in Bow would be pounds 20.25 a month - pounds 243 a year.

(Photograph omitted)