The Department of Trade and Industry is consulting on whether to widen its proposed ban on insurance products tied in with mortgages to include the £17m mortgage indemnity guarantee (MIG) market.
MIG insurance has been branded a one-sided deal in that it protects only the lender in the event of a house repossession. The borrower, who has to pay the premium, can be pursued for any outstanding debt for up to six years.
The DTI is seeking to ban all mortgage tie-ins such as accident, sickness and unemployment cover, and is backed by Biba which has campaigned hard against them.
Biba chief executive, Mike Williams, said: "This is an issue that continues to concern our members and we would welcome any measure that would extend choice in this field."
But the Council of Mortgage Lenders' spokeswomen, Michelle Vosper, said MIG was an altogether different product to tied-insurance products because it was arranged by the lender and not the borrower.
She said MIG was, in effect, a fee paid by the borrower to obtain a higher-value mortgage, usually above 90% of the property's value.
Monty Burn, who was sacked for publishing details of 'rip-off' tied insurance products, has written to the Office of Fair Trading calling for the abolition of MIG.
Burn claims that MIG cover is fatally flawed because the borrower pays the premium, but the lender is the main beneficiary of the policy.
Burn is preparing to launch an alternative to MIG that he claims is more favourable to the consumer.
His Home Repossession Insurance policy makes the consumer the main beneficiary and ensures they get a fair price for their property if it is repossessed.
The government this week issued a consultation paper on the issue.
The consultation document asks if MIG should come within its planned ban but questions whether the knock-on effect of this would be to make it more difficult for first-time buyers to obtain mortgages.
It warns that if lenders are forbidden from charging a premium for MIG, they may instead charge a 'fee' or absorb the cost by charging higher mortgage rates.
An ABI spokeswoman said the MIG market had yet to fully recover from the property slump of the late 1980s when negative equity was a major problem. The size of the market is relatively small, with a premium income of around £17m in 1998.