House conveyancers are adding one more bit of indemnity insurance to some house purchasers’ bills – and it looks as if “gifted deposit indemnity insurance” is of no use except to the insurers who sell it.
Add it to the list of various types of indemnity insurance for chancel repairs; for failure of a previous owner to gain planning permission; for a previous owner breaching restrictive covenants; indemnity for various other legal costs. Some of these products are of dubious value – but a new study suggests gifted deposit indemnity insurance – used (at the homebuyer’s expense) to protect banks if someone giving a gift towards a home purchase goes bankrupt – has no real function at all.
The issue is increasingly significant as more and more parents are giving financial help for their children’s home purchases. The insurance is paid for by the home buyer, intended to protect the mortgage provider, but in reality would only kick in if the conveyancers weren’t doing their job properly or the bank itself was acting in bad faith. Arguably that means it actually has no real purpose at all.
The principle behind the insurance is that it protects the mortgagee’s (ie bank lending the money) title in the property if the donor of a gift or informal family loan goes bankrupt and creditors make a claim to the money as part of the donor’s assets. Buyers are said to feel pressured into buying the insurance, costing up to £300, even though they don’t understand it.
But is it strictly necessary? There is strong evidence that conveyancers are the ones who don’t understand the law and that the insurance is for the most part unnecessary – even when “bank of mum and dad” does go belly-up.