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Is insurance a requirement of having a mortgage?

Is insurance a requirement of having a mortgage?

21 Aug, 2023 - 4 min read

Is insurance a requirement of having a mortgage?

While home insurance isn’t compulsory in Australia, many mortgage lenders require borrowers to have a home insurance policy in place over a property before they’ll approve a home loan application.

You aren’t legally required to have home insurance in Australia, like how you need a Compulsory Third Party (CTP) policy for your car. If you’re willing to take the risk, you could go without the expense of home insurance, though you’d have to cover the repair or rebuilding costs yourself if the worst were to happen.

However, many Australian mortgage lenders require borrowers to have a sum-insured or total replacement home insurance policy in place as part of the eligibility requirements for their home loans.

This is because a mortgage is secured by the value of the property it is being used to purchase, a bit like a secured car loan. If the building is damaged or destroyed by a fire, flood, or similar disaster, the resulting loss of value would mean that if the borrower also defaulted on their home loan, the lender couldn’t realistically recover their money by repossessing and selling the property.

Having a home insurance policy in place means that even if a property is damaged or destroyed, the lender (and the homeowner!) can be confident that it will be repaired or rebuilt to a similar standard, so it can continue to secure the home loan.

You can typically apply for home loan pre approval without needing insurance. But once you’ve found a property and had an offer accepted, the lender may want you to show them you have a home insurance policy in place from settlement date to confirm your final approval.

Do you need home insurance to buy an apartment?

Apartments, townhouses, villas and similar strata units may be treated differently to houses when it comes to home insurance and home loans. This is because these properties are often already insured by the strata corporation. If the property is damaged or destroyed, it should already be covered, so another home insurance policy shouldn’t be necessary.

Do you need Lender’s Mortgage Insurance (LMI)?

Lenders Mortgage Insurance (LMI) is typically only required if you are applying for a mortgage with a deposit of less than 20% of the property’s value. This would mean you’re borrowing more than 80% of the property’s value, increasing the lender’s financial risk if you were to default on your home loan.

An LMI policy only covers the lender’s risk, NOT the borrower’s, and most lenders pass the cost of LMI on for the borrower to pay. The smaller your home loan deposit, the higher the Loan to Value Ratio (LVR) and the more you may need to pay for LMI.

Before applying for a home loan with a low deposit, it may be worth estimating the potential cost of LMI to get a better idea of if the mortgage will be worth it.

If you DO want a home insurance policy that covers you if you’re unable to afford your mortgage repayments, you could consider comparing income protection insurance quotes.

Do you need contents insurance?

Contents insurance is not required to take out a home loan, as it only covers damage to the possessions stored in a home, and not the building itself, which is where the mortgage lender’s interest lies.

Owner occupiers may be able to apply for a combined home and contents insurance policy, which may cost less in total than two separate policies.

Do you need landlord’s insurance?

Getting a mortgage on an investment property may also require you to take out a home insurance policy to help cover the risk if the property is damaged or destroyed. Some insurers offer specialised landlord insurance policies, which are structured with investment properties in mind.

Even if you’re buying a strata unit as your investment property, it may be worth considering a landlords insurance policy. While damage to the unit due to natural disasters and the like should already be covered by the strata’s insurance, landlord insurance may also cover some other specific risks, such as damage caused by tenants.

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Product database updated 27 Apr, 2024

This article was reviewed by Personal Finance Editor Peter Terlato before it was published as part of RateCity's Fact Check process.

Mark Bristow

Personal Finance Editor

Mark Bristow is RateCity's Home & Personal Finances Editor, and an experienced analyst, researcher, and producer. Focused primarily on Australian mortgage and home loan expertise, he has been a journalist and writer in the financial space for over ten years, previously researching and writing commercial real estate at CoreLogic. In the years since, Mark has worked for the Winning Group, Expedia, and has seen articles published at Lifehacker and Business Insider.