Home insurance for first home buyers: what you need to know

Key points

• Home insurance is a type of policy that can provide financial coverage for your property.
• Home insurance premiums vary depending on your home's risk factors.
• Home insurance is an important home ownership cost for borrowers to budget for. 

Finding your dream home is no small feat! Once you have your home loan settled, celebrations are definitely in order. But there's one last item to consider: home insurance.

Home insurance, sometimes called home & contents insurance, is a type of policy you can take out that gives financial coverage to your building and belongings in case of damage, loss, or theft.

While home insurance is not required in Australia, having adequate building coverage might be a condition of your new mortgage.

So what do first home buyers need to know about home insurance? Let's look at how to compare policies.

Building insurance is a type of home insurance policy that specifically covers the structure of your home. It is designed to financially protect you against things beyond your control like bushfires, floods, or a natural disasters like cyclones.

There are two types of building insurance cover to choose from:

• Total replacement cover. Includes all the costs to rebuild your home and restore it to the state it was in before the insured events.
• Sum-insured cover. This covers damage up to a fixed amount. 

Contents insurance is a specific kind of policy that covers your household belongings, such as your TV, furniture, clothes, and so forth. For this reason, it's quite a common policy for renters.

If you already have contents cover, it might be worthwhile bundling this with building insurance cover when you buy your first home. Many insurance providers offer multi-policy insurance discounts. This might be the most cost-effective way for you to insure both your home and your belongings.

Home insurance isn't mandatory, but your home loan lender may require is as a condition of your contract, in addition to any lenders mortgage insurance (LMI), which protects them in case you default on your mortgage repayments. 

This doesn't mean you have to purchase home insurance from your lender. Shopping around and comparing home insurance providers can clue you into which policies offer great value and coverage. 

When buying a new home, it's generally wise to have a building insurance policy in place from when you sign the sale contract and pay the home loan deposit. At this stage, you've legally committed to buy the property, though the exact rules vary from state to state. 

Generally, you can organise to get a coverage note or statement of insurance from your insurance company. Doing this provides proof of coverage until the settlement date, when your actual policy kicks in.

In most instances, if insurance is required as part of your mortgage contract, a copy of the cover note will need to be sent to your lender in order for them to release the funds for settlement.

You should also get your contents insurance organised before you start moving your things to your new house, as some contents policies include damage or loss of belongings while in transit.

In 2023, Mozo found the average home insurance cost to be $1,460 per year. However, this varied wildly depending on the policyholder. 

The cost of your home insurance policy depends on a number of factors. These factors establish your risk profile. Just like a home loan lender will slap a risky borrower with high interest rates and fees, an insurance provider sticks risky policyholders with higher premiums. 

Some factors affecting your premium include your home's:

• Location
• Condition
• Age
• Building material
• Security features.

Different home insurance providers will also have different comfort levels when it comes to risk exposure. This is why it's important to get home insurance quotes. One provider might offer you more coverage for a lower premium. It's about value, not just price!

Like all financial products, even cheap home insurance has drawbacks to consider. For example, cheap or bare minimum coverage may not give you adequate protection. If the coverage isn't enough, then the premium is hardly worth the money – even if it is cheap.

Instead, focus on finding good value. You can do this by comparing home insurance quotes. In the meantime, you can also try these strategies for lowering your home insurance premium.

• Look for discounts. Some insurance companies have loyalty, multi-policy, online sign-up, or no-claims discounts. See which ones you may be eligible for.
• Opt for annual premiums. Monthly premiums may be more expensive than annual premiums.
• Increase your excess. Raise the level of excess you are willing to pay upfront if you need to make a claim. Generally speaking, the higher your excess, the lower your insurance premium.
• Reduce your risk. Keep your gutters clean, install locks on doors and windows, or invest in a security alert system. Even a home renovation to replace old roofing material can sometimes have an effect. 

The market value of the property and the cost to rebuild it are not the same thing. A home's value is in the land, whereas building insurance covers the cost for the raw materials, labour, and design work required to completely rebuild a house in the event of total disaster.

There are two methods insurance providers will use to estimate how much cover you need:

• Cost per square metre. This method provides a rough guide based on the size of the house and the materials used.
  
• Elemental estimating. Assess in detail the different elements of the building to calculate rebuilding costs from the ground up, using local wage and material rates and other construction data.

Underinsurance is a problem in many parts of Australia. If you are buying in a high-risk bushfire or flood-prone area, it will be important you get an accurate estimate for your building insurance to ensure you are covered in the event of a disaster.

Think about how much the house will cost to rebuild in current market conditions, including redesign costs and materials, and adjust your sum insured to cover this amount.

Here's our home insurance checklist for your property to get your started. 

Bamboozled by all the home insurance jargon? Read our jargon busting guide.