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Do I need to buy home insurance before closing on a property?

Do I need to buy home insurance before closing on a property?

Having adequate home insurance can help manage risks from unforeseen events like floods, bushfires and other natural calamities. But if you’re purchasing a property, you need to know when the responsibility for property damage shifts between the seller and the buyer to make sure there’s no gap in coverage at any time. 

In some parts of the country, the seller may be responsible for damages only until the exchange of contracts. After that, it becomes the buyer’s responsibility. In other parts, the seller continues to be accountable until closing or settlement, when the balance of the price is paid, and the property legally transfers to the buyer. 

Generally, the standard contract of sale in a state or territory is a good place to look to determine when the liability for damage passes between the seller and the buyer. Most property purchases use a standard contract of sale, so these terms would be consistent across the state. Here’s a summary of the standard position in various states:

  • ACT, South Australia and Tasmania – The responsibility for damage to the property passes to the buyer on exchange of contracts.
  • Northern Territory and Western Australia – The buyer becomes responsible for property damage on whichever of the below occurs first:
    • The date the purchase price is paid in full.
    • The date the buyer is entitled to or receives possession of the property.
  • New South Wales and Victoria – The responsibility for property damage shifts to the buyer on closing or settlement of the property purchase.
  • Queensland – The buyer becomes responsible for damages at 5 pm on the first business day following the exchange of contracts.  

Despite the standard position in a state or territory, the contract of sale may differ from these terms and pass the risk to the buyer at a different time. It’s important to read through the contract and speak with a conveyancer, solicitor, or lawyer to correctly understand the terms.

When to buy home insurance during the sale?

If you plan to purchase a home, your lawyer or solicitor may ask you to buy insurance before closing irrespective of when the responsibility for damages passes on to you. They’ll advise as a way to protect your interests and avoid any nasty surprises later. For example, if the responsibility for damages passes to you on the settlement date but there’s a delay in taking out insurance, you would have to pay to fix any possible damage out of pocket. 

Some lenders also require you to get home insurance as a condition of home loan approval to protect their interests as well as yours. It’s worth checking with your lender if they have this requirement to void any delay in getting your home loan approved.

If you’re purchasing an apartment in a strata-managed building, building insurance is often covered by strata. This insurance cost would be split between all owners in the building and covered by your strata fees. It typically provides coverage for the building including common property like gardens and stairwells, and other items listed on the property’s title. However, it doesn’t cover your belongings or anything that’s not permanently attached to the building. You should look into contents insurance to cover these things. 

The bottom-line

Getting the right home and contents insurance policy gives you peace of mind that what’s likely your most costly asset is well-protected.

As a buyer, you may choose to err on the side of caution by getting home insurance before closing even if the seller’s insurance covers the property until settlement. It’s often better to be safe than sorry, as the saying goes. You can also discuss the matter with your lawyer or conveyancer to figure out when you need to buy home insurance during the sale process. 

Increase your chances of finding a competitive deal on home and contents insurance by comparing home insurance policies online. Once you have a shortlist of policies, compare the features and benefits offered by each policy. You should also go through the Product Disclosure Statement (PDS) thoroughly to make sure you get the right cover for your home.

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This article was reviewed by Kate Cowling before it was published as part of RateCity's Fact Check process.

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