Why You Need Home Insurance When You Take Out A Home Loan

Your home is probably your single most valuable earthly possession. Imagine the dire consequences if you were to suddenly find yourself without a home and without the means to rebuild it after something catastrophic had happened. This is why, as a prudent or responsible homeowner, you would want sufficient insurance protection for your home, not only against risks (such as fire, lightning, storm damage, explosions, etc), but also against damages (such as burst geysers, broken windows, etc.) and indirect damages (such as ceiling and carpet damage caused by water from a burst geyser) too.

Home insurance address both parties’ risks

When you want to secure a home loan to purchase a new house, home insurance will be one of the loan conditions that you will need to comply to. If you don’t meet this requirement, the bank will in all likelihood decline your home loan application without further ado.

They have two reasons for being as strict as they are about home insurance:

1. Due to their loan exposure in your home. The bank will want a guarantee that should anything happen to your home that drastically reduces its value, there will still be a source of funds to settle the outstanding balance on your home loan.

2. Due to your debt exposure. Your home loan constitutes a massive debt, – one that you will remain liable for even if your home had to disappear from the face of the earth. Should anything happen, your home insurance will enable you to restore your home or, if restoration to its former state is not possible, settle what remains of your home loan debt. This affords you the ability to make a new start.

Purchasing Home Insurance

When the topic of home owner’s insurance arises during your home loan application process, the bank will no doubt offer their own home insurance product to you to consider as an option.

Making a hasty decision is not advisable. You should shop around to compare the different home insurance products offered, both from a benefits and a pricing perspective. You may also want to do research on the responsiveness of the various insurance companies where pay-outs are concerned – just to be sure.

If you choose to purchase an outside home owner’s policy, the home loan provider is likely to levy an additional monthly fee. This is a kind of service charge that normally includes the cost of annual inspections on the property (in preparation for renewal of the policy).

The bank will also request certain information to assess the adequacy of the home insurance cover you selected. These include:

  • An official Quotation document
  • The name and address of the insurance company and / or the insurance broker
  • Policy number
  • Amount of the insurance cover or the sum insured
  • Amount of the total premium payable
  • Frequency of payment of the premium
  • Effective dates of the policy, both for inception and for renewal
  • Limits of cover, detailing all the inclusions and exclusions
  • Special terms and conditions, if any
  • Excess amounts in the various categories

You will need to maintain the home insurance cover for at least the term of your home loan.

To conclude

Considering that property prices are continuously on the rise, you would be well advised to reassess your home insurance cover at least once a year to establish whether you are still sufficiently protected. If you find that there is a need to adjust your premiums in order to improve the sufficiency of your home insurance cover, it is a good idea to go ahead and do it. It is an adjustment you can’t really afford not to make.