What Is Impound Insurance? Everything You Should Know
- UK Sure
- 5 days ago
- 6 min read
Introduction
When purchasing a property, you'll encounter numerous financial terms and concepts that may seem rather confusing at first glance. One such concept is "impound insurance," also known as an escrow account or impound account.
Despite its name, impound insurance isn't actually an insurance product—it's a financial arrangement that helps homeowners manage certain property-related expenses.
This comprehensive guide will explain everything you need to know about impound accounts, how they function, and whether they're the right choice for your situation.
What Is an Impound Account?
An impound account (also called an escrow account) is a separate account set up by your mortgage lender to collect and hold funds for paying property-related expenses such as council tax and buildings insurance.
The account works by collecting a portion of these annual costs monthly alongside your mortgage payment, ensuring these significant expenses are budgeted for throughout the year rather than coming due as large lump sums.
When you make your monthly mortgage payment, it typically includes:
Principal (payment towards your loan balance)
Interest (cost of borrowing the money)
Council tax (placed in the impound account)
Buildings insurance premiums (placed in the impound account)
Your mortgage servicer manages this account, making the necessary payments for your council tax and insurance when they become due.
How Impound Accounts Work
You'll need temporary impound insurance in these common scenarios:
Your vehicle was impounded for driving without insurance
Your existing policy doesn't cover impounded vehicles (many standard policies exclude this)
You need immediate coverage outside normal business hours
You require insurance to transport the vehicle from the impound facility to your home
Your vehicle was seized due to driving without a valid MOT or tax
UK authorities won't release an impounded vehicle without valid insurance documentation. The Motor Insurance Database (MID) allows real-time verification of insurance status, making proper coverage non-negotiable.
Key Features of Temporary Impound Insurance
The process of managing an impound account follows a straightforward pattern:
Initial Setup: When closing on your home purchase, your lender calculates the annual cost of your property taxes and homeowners insurance.
Monthly Collection: These annual costs are divided by 12, and that amount is added to your monthly mortgage payment.
Cushion Requirement: Most lenders require a "cushion" of additional funds in the account—typically two months' worth of payments—to cover any unexpected increases in tax or insurance costs.
Annual Analysis: Once a year, your mortgage servicer will analyze your account to ensure you're not paying too much or too little into it, adjusting your monthly payment if necessary.
Automatic Payments: When your property tax bill or insurance premium comes due, your mortgage servicer pays these bills directly from your impound account.
Are Impound Accounts Required?
Whether an impound account is required depends on several factors:
Loan-to-Value Ratio: If your deposit was less than 20% (meaning your loan-to-value ratio is over 80%), most lenders will require an impound account.
Government-Backed Loans: Certain government-supported mortgage schemes typically require impound accounts regardless of deposit size.
Lender Policies: Some lenders require impound accounts for all borrowers, whilst others make them optional.
Regional Regulations: Some areas have laws restricting when lenders can require impound accounts.
Even when not required, many property owners choose to maintain impound accounts voluntarily for the convenience and peace of mind they provide.
How to Obtain Temporary Impound Insurance
Follow these steps to secure temporary impound insurance:
Gather necessary information:
Vehicle registration number
Impound reference number
Expected release date
Vehicle Identification Number (VIN)
Details of any vehicle modifications
Contact specialised providers:
Tempcover
Dayinsure
Insurance Factory
One Call Insurance
Adrian Flux
Traditional insurers typically cannot provide cover for impounded vehicles due to their underwriting restrictions.
Complete verification checks:
Provide identity documentation
Explain impoundment circumstances
Share driving history information
Pay upfront: Full payment is required before coverage begins, typically via credit or debit card.
Receive documentation: Electronic insurance certificates arrive within minutes, ready to present to the impound facility.
Contact the pound: Confirm they'll accept your insurance documentation before visiting.
Advantages of Impound Accounts
Impound accounts offer several benefits that make them attractive to many homeowners:
1. Budget Simplification
Rather than saving for large annual or semi-annual bills, your council tax and insurance costs are spread out in equal monthly instalments alongside your mortgage payment.
2. Peace of Mind
You needn't worry about forgetting to pay these important bills—your mortgage servicer handles the payments automatically when they're due.
3. Protection from Council Tax Arrears
Since your council tax is paid automatically through the impound account, there's little risk of missing payments that could result in legal action regarding your property.
4. Potential Discounts
Some insurance companies offer discounts when premiums are paid through an impound account because it reduces their administrative costs and ensures timely payment.
5. Simplified Recordkeeping
With fewer separate bills to track, your financial paperwork and budgeting become more streamlined.
Disadvantages of Impound Accounts
Despite their convenience, impound accounts have some potential drawbacks:
1. Reduced Financial Flexibility
The money in your impound account can only be used for its designated purpose—you can't access these funds for other needs, even in emergencies.
2. Opportunity Cost
Funds sitting in an impound account typically earn little to no interest. You might earn better returns by keeping these funds in a high-yield savings account until the bills are due.
3. Initial Cash Requirement
At closing, you'll need to fund the impound account with several months' worth of expenses, increasing your upfront costs when purchasing a home.
4. Potential for Errors
Mortgage servicers sometimes miscalculate the required payments or fail to pay bills on time, which could lead to complications.
5. Adjustments Can Impact Budget
If your property taxes or insurance premiums increase, your monthly mortgage payment will also increase, potentially disrupting your budget.
What Happens if Your Impound Account Is Short?
If your council tax or insurance premiums increase more than anticipated, your impound account may have insufficient funds to cover the bills. When this happens:
Your mortgage servicer will typically pay the full amount due anyway.
This creates a "shortage" in your account.
Your lender will then offer you two options:
Pay the shortage amount in a lump sum to bring the account back to the required level
Have the shortage amount divided by 12 and added to your monthly mortgage payments for the next year
Similarly, if costs decrease or if too much has been collected, you may have an "overage" or "surplus" in your account.
In this case, if the surplus exceeds the allowed cushion amount (typically two months' worth of payments), your mortgage servicer must refund the excess to you.
How to Request an Impound Account Cancellation
If you prefer to manage your property expenses independently, consider these alternatives:
1. Self-Managed Savings Account
Create a dedicated high-interest savings account where you deposit 1/12 of your annual council tax and insurance costs each month.
2. Budget Apps
Use budgeting apps or software that can help you set aside money for specific purposes and remind you when bills are due.
3. Annual Payment Plans
Some insurance companies offer discounts for paying the annual premium in full rather than in instalments.
4. Council Tax Payment Plans
Many local authorities offer payment plans that allow you to pay council tax in instalments rather than in one or two large payments.
Conclusion
Impound accounts provide a convenient way for property owners to manage significant property-related expenses by spreading the cost throughout the year.
Whilst they offer peace of mind and simplify budgeting, they also reduce financial flexibility and may not be the best choice for everyone.
When deciding whether to use an impound account, consider your financial discipline, cash flow situation, and personal preferences.
If you're uncertain, consult with your mortgage lender or a financial adviser who can help you determine the best approach for your specific circumstances.
Remember that property ownership comes with many financial responsibilities, and how you manage them can significantly impact your overall financial health.
Whether you choose to use an impound account or handle these expenses independently, staying informed and planning ahead will help ensure you can meet your obligations and enjoy your home with confidence.
Frequently Asked Questions
1. What is impound insurance?
Impound insurance isn't actually insurance—it's a financial account set up by mortgage lenders to collect and hold funds for paying council tax and buildings insurance premiums on your behalf.
2. Is an impound account the same as an escrow account?
Yes, "impound account" and "escrow account" are different terms for the same thing. The terminology often varies by region, with "escrow" being more common in some areas than others.
3. Can I earn interest on my impound account?
This depends on regional regulations. Some areas require lenders to pay interest on impound account balances, but many don't. Even when interest is paid, the rates are typically very low.
4. What happens to my impound account if I remortgage?
When remortgaging, your existing impound account will typically be closed, and any remaining balance will be refunded to you. Your new lender will establish a new impound account, which you'll need to fund at completion.
5. Can my lender increase my monthly impound payment?
Yes, if your council tax or insurance premiums increase, your lender will increase the amount collected for your impound account accordingly. They're required to notify you of this change in advance.
Are you looking for Impound insurance?
Call UK Sure on 01323 416706 or click here to get a quote
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