Key highlights
Most mortgage lenders in Australia require borrowers to have home insurance in place before approving a home loan application.Lenders mortgage insurance (LMI) is typically required for mortgages with a deposit of less than 20% of the property's value.Contents insurance is not required for a home loan, as it only covers possessions and not the building itself. Landlord's insurance may be useful for investment properties.While home insurance isn’t compulsory in Australia, most 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 home insurance and avoid paying premiums. Of course, if the worst were to happen, you’d then have to cover the repair or rebuilding costs yourself.
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, a bit like a secured car loan. If the building is damaged or destroyed by a fire, flood, or similar disaster, and the borrower also defaulted on their home loan, it’s unlikely the lender could realistically recover their money by repossessing and selling the damaged or destroyed 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 its value 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 the 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’d be 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 still be worth it.
If you DO want an 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 require you to take out a home insurance policy to help cover the risk if the property is damaged or destroyed, just like with owner-occupier home loans. 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’s structure 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.
Product database updated 14 Sep, 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. While primarily focused on Australian mortgage and home loan expertise, he has experience across energy, home and travel insurances. Mark 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.
Mark Bristow is RateCity's Home & Personal Finances Editor, and an experienced analyst, researcher, and producer. While primarily focused on Australian mortgage and home loan expertise, he has experience across energy, home and travel insurances. Mark 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.
FAQs
You're not required by law to have home insurance, but banks do require it as a condition of your mortgage. Home insurance can help you protect yourself from enormous financial loss. It can also help cover the cost of paying for bodily injury to others or damage to their property.
Do you need insurance to have a mortgage? ›
Your mortgage lender will require homeowners insurance
That's because lenders need to protect their investment. In the unfortunate event your house burns down or is badly damaged by a hurricane, tornado or other disaster, homeowners insurance safeguards them (as well as you) against financial loss.
Is it a must to have mortgage insurance? ›
Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home need to pay for mortgage insurance. Mortgage insurance also is typically required on Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans.
What happens if you have a mortgage and no homeowners insurance? ›
If you have a mortgage or other home loan, keeping an insurance policy in place is likely a requirement of your loan agreement. Your lender will be notified of policy renewals and cancellations. If you fail to purchase coverage or let it lapse, your company may send your mortgage into default.
Do you need insurance if your house is paid off? ›
Once you've made your last payment, your mortgage lender will no longer have any say in whether you carry insurance. But consider the fact that you've spent years investing in your home and building equity, and should a loss occur, you will want to have the protection of insurance for that investment.
Is there a way to not have mortgage insurance? ›
Mortgage insurance can be removed on certain loan types. If you have a conventional loan, you can have your mortgage insurance removed when you hit 20% equity in your home. If you have a government-backed loan, the best way to get rid of your premiums may be to refinance to a conventional loan.
Do banks require mortgage insurance? ›
However, a lender likely will require you to pay for private mortgage insurance, or PMI, if your down payment is less than 20%. Before buying a home, you can use a PMI calculator to estimate the cost of PMI, which will vary according to the size of your home loan, your credit score and other factors.
Can I get rid of my mortgage insurance? ›
You have the right to ask your servicer to cancel PMI on the date the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home. The first date you can make the request should appear on your PMI disclosure form, which you received along with your mortgage.
What is the average cost of mortgage insurance? ›
Private mortgage insurance rates vary by credit score and other factors and typically range from 0.58% to 1.86% of the original loan amount. The total amount of PMI you'll pay until you reach 20% equity.
Does FHA require mortgage insurance? ›
FHA loans require you to pay for mortgage insurance when you buy or refinance a home, regardless of the amount of your down payment or home equity.
It serves as a financial shield, offering coverage in the event of property damage or loss of belongings. Now, if you are wondering "Is property insurance mandatory"? It is not. However, even if home insurance is not mandatory in India, it comes highly recommended and is considered prudent for homeowners.
Who is the cheapest home insurance? ›
USAA and Auto-Owners are the cheapest home insurance companies on average, according to Bankrate's research.
Do you really need home insurance? ›
Home insurance protects you from lawsuits
There's always a chance a visitor could get hurt on your property, and if that injury leads to medical fees (aka bodily injury), you could be sued for damages. This type of coverage is called personal liability, and it's really important to have.
Is it OK to cancel home insurance? ›
A policyholder can also initiate a home insurance cancellation. Perhaps you found a cheaper company or you have sold your home. You can call your agent or carrier to request that your policy be canceled on a specific date. You may need to sign a cancellation form to confirm your request.
Does your homeowners insurance go down when you pay off your mortgage? ›
Unfortunately, paying off your mortgage doesn't reduce homeowners insurance premiums. You will no longer be required to carry home insurance as it isn't legally mandated, but your home will still require the same level of coverage to protect you from financial losses.
Is house insurance cheaper without a mortgage? ›
No, house insurance isn't cheaper without a mortgage. Your home is vulnerable to the same risks whether you own it outright or are still making payments. Therefore, home insurance providers don't consider your mortgage status during underwriting.
Is mortgage protection insurance required? ›
Is MPI Ever Required? Unlike some insurance products that are required when you buy a home, MPI is optional. However, MPI may be worthwhile to get under certain circ*mstances.
Is mortgage insurance almost always required? ›
If your down payment is lower than 20%, you are more likely to be required to have mortgage insurance. This is because lenders consider low down payments a greater risk, and they want some form of financial protection should they have to foreclose on the home.
Which type of insurance might lenders require borrowers to have when taking out a mortgage? ›
Private mortgage insurance (PMI) is insurance that a mortgage lender may require you to purchase if your down payment is less than 20%. Private mortgage insurance is designed to protect the lender in case you default on the payments.
