How to protect your home for the future
It's likely that your home is the most expensive asset that you'll purchase in your lifetime. Protect the asset that you've worked so hard for by taking the right steps to protect it for you and your family. As part of their lending criteria, most Australian lenders require that security properties are insured against loss or damage, and that you also take out building insurance.
Insurance is also crucial if you plan on accessing your equity in the future, as you are borrowing against your home. You will need to maintain adequate insurance on the property and keep it in a good condition. You may also need to obtain your lender's approval for other people to reside in your property if need be.
It's important to note that when choosing an insurance policy, the circumstances of every person and situation is different. Speak to an insurance broker to discuss your specific needs.
Home and contents insurance
Insuring is the most common method of managing the potential risk of loss or damage. It can apply to an individual or property and it works by transferring the risk to an insurance company, in return for a payment which is known as a premium. Your household will typically pay lump sums on a regular basis to protect against an event if it results into some element of financial hardship. The most common type of insurance used to protect properties is home and contents insurance.
The cost of insurance is considered as an expense when a lender is assessing your financial position and is also considered as a 'financial need' within the household. If you already own a property and you're using it as a security property, you'll be asked to provide your insurance details.
Home and contents insurance is considered a medium-term insurance need and generally comes under 'general insurance'. This type of insurance tends to cover the concerns of individuals and household, as well as renewed on a yearly basis depending on whether or not the risk continues. Premiums increase and decrease each year, depending on your circumstances. Home and contents insurance allows you to operate with the peace of mind in knowing that your asset is protected in the event of financial hardship or an unexpected event.
A general insurance contract is usually called a policy and this contains the terms of the agreement or the product disclosure statement.
- Where can I get home and contents insurance? Your lender should be able to recommend general insurance to you, but be mindful that in some cases they may get a commission for this so you might also want to compare a range of insurance providers yourself.
Building (home) insurance
This cover provides protection against damage or destruction to residential buildings such as flats, units, townhouses and houses. Generally, building (home) insurance also includes other structures such as garages, sheds, fences and decks. Lenders require this as the minimum insurance when using a property as security.
Often combined with home insurance, contents insurance covers loss or damage to domestic goods or property that you own. It may cover goods that an insured person buys as well.
This type of insurance protects owner-builders from losses during the process of building or construction. This cover is usually optional under a standard building policy or could be required to be taken out as a separate policy.Back to top
Lender's Mortgage Insurance (LMI)
Loans that are attached with a security, such as a home loan, are generally insured regardless of the loan to value ratio (LVR) or the loan amount. The borrower generally pays LMI on full documentation loans when the LVR is above 80% and the lender pays LMI when the LVR is less than 80%. For low documentation loans, the LVR is around 60%.
LMI protects the lender in the event that you default on your loan, or you're unable to meet your repayments. If the borrower decides to sell the home and there is a shortfall in the funds, the insurer pays out the outstanding balance. Some major Australian LMI providers are QBE and Genworth Financial.
The type of loan and its conditions offered to you are often influenced by the LMI provider and their individual criteria. If LMI is required, the decision of the insurer is pivotal to your loan approval. In some cases, a loan might be provided but with additional assets used as security. This may include additional real estate or establishing another guarantee.Back to top
Protecting your investment property
As many investment property loans exceed 80% LVR, additional security or LMI is often required. Lenders will generally allow up to 95% LVR for loans with LMI. Some lenders will let you use your current home as security and depending on its value, and the amount of equity you have, this could mean that you avoid paying LMI.
This may be available as an option under building insurance or taken out as a separate policy. It protects landlords even further against events such as malicious acts and theft by the tenants or financial losses should the tenant fail to pay their rent.Back to top
Tips for protecting your home
- Consider income protection. Maintain the stability of your income by taking out income insurance. This ensures that you continually receive an income should anything happen to your ability to work.
- Maintain a cash buffer. It's best to keep some equity or liquid assets handy as one of your risk management measures so that you can prepare for unexpected emergencies.
- Lock in your interest rate. While there is the risk that you won't benefit if interest rates fall, a fixed interest rate eliminates any future guesswork as to what your repayments will be in the future. This can help with future budgeting and financial planning.
- Beware of cross-collateralisation. This is when the liabilities from one asset are woven into the liabilities of another. One example is when you use the capital appreciation from one property to finance another property. If you can't meet your repayments with one asset, this could ripple through your debt structure which could harm your entire portfolio.
- Use a trust. This is a legal entity that can own a property and has beneficiaries that identifies where the returns of the investment go. A benefit of a trust is that if a debtor takes action against you, the trust is protected. If your property assets are owned by a trust only the creditors of the trust can take legal action.
- Consider a pre-nup. While it's a topic that makes us uncomfortable, if you're getting married or you're in a long-term relationship and you want to ensure that your assets stay protected, then this can provide you with added security. A pre-nup states how the assets will distributed should a marriage breakdown occur.
- Make sure your will is up to date. If you ensure that your will is up to date, it can protect your assets and ensure that they are distributed how you would like them in the event that you pass away.
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Frequently asked questions
What would be a good solution to protect my home against courts or creditors should anything happen to me?
There is the option of putting your home into a trust but there are a number of tax implications you'll need to consider. Speak to your accountant about what structure best suits your needs.
What's builders warranty insurance?
As a licensed or owner-builder within Australia, you may need insurance to meet certain regulations. This includes cover triggered by the death of a builder, disappearance of the builder and insolvency of the builder.