Article by Patrick Lynch, Head of Operations
Whether you own or are thinking of buying a property, insurance may have come up. There are many different types of insurance, depending on whether the property is your home or investment, a house or apartment, etc. But is insurance necessary – and why does my Bank want evidence?
What is insurance?
Simply, insurance protects against potential future financial loss. You pay a premium today, or over time, and in return the insurer agrees to pay you money if the loss event occurs. For example:
- You insure your car, in case you have an accident
- You have health insurance, should you ever need medical assistance
- You take out income protection or life insurance, so you or your loved ones are looked after
- You insure your property, to cover against damage
Could you go without insurance – sure, if you wanted to save the outlay today, but what happens when you need help tomorrow? Insurance plays a crucial role in a risk mitigation strategy and Long Property recommends that clients put appropriate insurance in place. For lending purposes, property insurance is often a requirement before the Bank provides finance.
What types of property insurance are there?
Building insurance provides cover for damage or destruction of the property, ancillary buildings such as a garage, and permanent fixtures like plumbing, kitchens, etc. – paying out for repair or rebuild. It is designed for stand-alone properties, i.e. a house, rather than a unit or apartment.
If you live in a unit or strata title apartment, the entire building is likely covered by residential strata insurance (or body corporate cover). Any cost is shared by owners of units within the building, collected through management fees or building levies.
Contents insurance covers possessions inside the property, rather than the building itself, and is suitable whether you live in a home or a unit. It can also be appropriate whether you own the property or are a tenant. Contents may include carpets and flooring, light fittings, cupboards and cabinets, etc. Contents insurance can be combined with building insurance – 2 separate policies but one premium.
If you own an investment, landlord insurance provides cover for your property, fixtures and fittings and can also cover (depending on the policy) any liability incurred by your tenant in connection with the property or for loss of rent.
Why do Banks need it? What do they need?
Whether you’ve purchased a property or are refinancing an existing property loan, one of the pre-settlement conditions to be addressed might include building insurance.
The Lender, in providing a loan to purchase a property or refinancing an existing property loan, hold a mortgage over the title. They request that their name be included under the insurance policy as ‘mortgagee’ or ‘interested party’. With this interest, they want to be informed should the property be damaged or destroyed, or if the owner makes a large insurance claim or fails to renew the policy.
If this is needed, the Bank or Lender will require a copy of your insurance certificate of currency or the body corporate/ strata insurance. The insurance certificate of currency should include:
- Insured party i.e. the owner(s) of the property.
- Insured address i.e. property address
- Policy number
- Protection period i.e. start and expiry dates of insurance
- Interested party i.e. the Lender or Bank
- Building insurance amount i.e. the maximum amount the insurance covers.
The insurance certificate of currency should comply with your Lender’s needs, i.e. noting the correct details of the interested party and for at least the replacement value sought. The replacement value has been determined by an independent valuation of the property. The owner can nominate higher if they want – higher cost but maybe more peace of mind (beware of over-insurance). It should be current and valid beyond the expected settlement date.
How do I get what the Bank wants, and when?
For properties already owned, a copy of the insurance certificate can be obtained from the insurance company or insurance broker. For a new purchase, contact an insurance company or insurance broker, seeking out quotes to compare cost and coverage. The certificate will generally be emailed directly and should then be forwarded to the broker for checking before providing to the Lender.
If your property is instead covered through strata insurance, the Bank or Lender will require a copy of the body corporate insurance. If it is your existing property, a quick call to the management company or body corporate will see them email this – it should be covered in your strata fees. For a new purchase, this will generally be part of the Contract of Sale or can be requested by your conveyancer/ solicitor from the Vendor. The Lender generally does not need to be noted on strata insurance.
The certificate is required at least a few days before settlement but can be obtained earlier. If the property is a house, the amount of minimum cover required will be known once/ if the Lender completes a valuation. In a house purchase, we agree with conveyancers who suggest clients obtain insurance immediately on signing a contract of sale, to protect the client’s interest. Many insurance companies can provide ‘free’ cover until ownership of the property changes. For a strata title unit or apartment, this can be obtained from the management company/ body corporate at any time.
Some Lenders don’t require a copy of your property insurance, or to be noted on the policy. For those that do, they generally don’t request the updated details each year – they assume you review insurance when it expires. If you don’t renew your insurance, you may be in breach of your loan terms, which could cause problems at a later time (higher interest rates, if the property is damaged, etc.).
What next?
Like your lending needs, it is important to review your insurance requirements regularly. Long Property are happy to provide a referral to a trusted insurance company for a no obligation quote. Whoever you get your insurance from, check that the policy provides the correct level of cover and that the premium (cost) is appropriate.
——–
The Long Property Show provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Nothing in the Long Property Show constitutes legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
