Before you close on the sale of your new home, you’re going to need to get home insurance. Most lenders won’t give you a mortgage without proof of home insurance, so it’s something that you need to secure between the time that your offer is accepted and your closing date.
You may wonder why lenders require home insurance of home buyers; if your home is damaged, then aren’t you on the hook for the cost, and for paying the mortgage? Yes – but it’s important to lenders that you have certain types of home insurance coverage because, although you are the insured, any loss or damage to property will have an effect on the fair market value of the property if not repaired.
“Individuals have to realize that, if there’s a mortgage on the property, just like if you have a loan on your car, you don’t fully own that asset,” says Pete Karageorgos, IBC director of consumer and industry affairs for the Insurance Bureau of Canada. “There’s someone else who has an interest in it. And so, because of the insurance policy recognizes that, it protects those individuals as well. It may not protect you if you’ve done something or if there’s some questions about the facts of the loss, but that loss payee or that additional insured still has rights under the policy to collect sometimes.”
At closing, proof of home insurance is provided to your lawyer. Inadequate insurance or lack of insurance can cause headaches and delay closing until your lender is satisfied.
Factors affecting home insurance premiums
It’s smart to get some kind of home inspection done before you get home insurance. Not because the insurers care about hidden issues that may cost you money in the long run, but because the inspection report provides valuable information as to the working systems in the home. This information will give your insurer accurate data so that they can put a price on the cost of your home to replace, as well as assess the risks of certain features of your home. Some examples of risk flags may be the age of your roof, if your home is in a flood zone, if your home has a fireplace (especially if it’s wood-burning), old electrical wiring, and the age of the structure itself. It would also be helpful to get a statement from the previous owner when it comes to any upgrades or replacements that they have done to the home.
In case you haven’t bought insurance before, you should know that some of the higher risks like those mentioned above lead to higher premiums, which can change the affordability of the home for the buyer.
“Increases in premiums can prohibit the marginal homebuyer from being able to afford homeownership and can severely strain the ability of existing homeowners on fixed incomes to continue to meet the ongoing costs of homeownership,” according to a document issued by the Canadian Real Estate Association
Premiums are also affected by your deductible, the amount that you pay in the event of a claim regardless of the amount of damage done. If you pay a lower deductible if you make a claim, then your premiums are higher, and vice versa. Also keep in mind that insurance is not a fixed cost. When considering the affordability of your home, consider that home insurance, like property taxes, will almost certainly rise, due to factors out of your control.
“Insurance affects affordability in more ways than just increased premium costs,” CREA says. “Our multifamily practitioners report that their insurance costs are also increasing due to lender demands for additional insurance coverage over and above what has traditionally been required for mortgage underwriting purposes.”
There are other options available that can lower your home insurance premiums. Some insurance companies may offer discounts to policyholders for members of certain affiliated groups or meeting certain criteria, including having smoke alarms and a monitored alarm system, policyholders who have never filed an insurance claim, senior citizens, or doing something that’s called bundling, which pairs different types of insurance together such as home and auto.
Types of coverage
Like with other types of insurance, there are different types of coverage. There is coverage for personal property, which can be distinguished between the replacement value of an item (the value of something replaced based on its original price) and its actual value (the value of something given its current condition, regardless of its original price; coverage that includes either insured peril (which means damage to the home that is accidental and unexpected) or uninsured peril (damage incurred by events such as flood, earthquake, any pest damage, and acts of terrorism); and no frills coverage, which is very basic coverage for properties that don’t meet underwriting standards.
Once you own your home outright, or if you purchase your property outright, you aren’t legally required to have home insurance – but going without it is certainly not advisable! You may decide that you’re okay with taking the risk that there won’t be significant damage to your home, or that you have enough money to pay for whatever damage may happen that you don’t need to pay insurance premiums. But in the event of a tragedy, the cost to replace your home and its contents would be out of reach for most people, and premiums can end up being relatively small compared to the cost of starting over.
“We have seen – and this is painful in Fort McMurray, we’ve spoken to individuals out there – who have paid off their mortgage and one day said, ‘hey, I’m mortgage-free, I don’t need to have insurance anymore,’” says Karageorgos. “Well, true, they don’t have to have insurance because they’re not obligated based on the mortgage contract for the loaning of the money to pay for their property because they own it outright, [so] people cancelled their home insurance policy at the same time they paid off their mortgage. In that situation, it’s a painful lesson that some folks have learned.”
Home insurance also includes liability coverage if someone gets injured on your property.
Property insurance isn’t limited to freehold homeowners. Owners of condominiums are responsible for their own unit while the condominium board is responsible for the exterior and all shared spaces. Similarly, home insurance for condo owners includes everything within their walls (contents and structure included), while the condo board insures everything else.
How much do you need?
With property insurance, you only want to insure for as much as you need. There is no point to overpaying when it comes to home insurance; you’re not going to get money back or be allowed to upgrade your contents in the case of loss, regardless of the level of coverage you have. So get the lowest amount of coverage possible for what you need.
There are two things to think about when obtaining insurance for your home. The first is the contents of your home. If everything in your home needed to be replaced – furniture, clothing, cookware, collectibles, appliances, antiques, electronics – that adds up quickly. The Insurance Bureau of Canada recommends having a complete list of the items in your home in case you ever need it for insurance purposes and reviewing that inventory each year when you renew your policy. Some items, including those that frequently leave the premises such as laptops, bikes, jewelry, or hobby equipment like scuba, climbing or camping gear, may not be covered as part of your standard policy. If they aren't, you’re often able to get a separate endorsement or rider to cover these items.
You're also going to get enough insurance to replace the actual structure of your home if it's damaged. The amount required for rebuilding is not the same as the value of your property, which is the basis for determining your property taxes.
You’re not covered for any and all damage once you start paying your insurance premiums. As mentioned earlier, uninsured perils are generally not included in your coverage. Some common exclusions include*:
- Damage caused by wear and tear, rust, corrosion or gradual deterioration
- Water damage caused by flood, underground water or water that enters through cracks in your foundation
- Damage arising from the freezing of indoor plumbing. Note: If you are away from home for more than four consecutive days over the normal heating months, you must drain the plumbing or arrange to have your home inspected on a daily basis by a competent individual to ensure that heat is maintained. If, however, freezing-related damage were to occur despite such precautions, it might be covered.
- Damage caused to the exterior of your home as the result of freezing, melting or moving snow or ice and heaving frost
- Damage caused by snowslide, landslide and other forms of earth movement (e.g., earthquakes). Note: However, damage from a fire or explosion caused by earth movement may be covered
- Damage caused by insects and rodents (e.g., termites, squirrels, mice, birds). Intentional or criminal acts (fraudulent claims).
Separate coverage is available for some of these exclusions, such as flood insurance and earthquake insurance, which fill in the gaps of many standard home insurance policies.
Don’t be afraid to ask questions!
As with mortgages, you can either go to an insurer directly to get and compare coverage, or use an insurance broker. Regardless of which way you choose, you’ll end up going over the particulars and details of your home in order to get an accurate price for your premiums. When confirming the details, be sure to ask about specific instances that concern you. “If there’s a fire, will the contents be covered that are unusable because of smoke damage as well as those that are destroyed completely by fire specifically?” “If there’s flooding in my home due to a severe storm as opposed to a flash flood, is that damage covered by my policy?” Do your endorsements or riders cover everything that you need? Don’t just get a standard policy with a standard level of coverage without understanding what will happen in certain circumstances.
While you’re required to get home insurance to protect your lender’s investment, you’re looking out for more than just an asset; you're looking out for your home.
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