Insurance an increasing concern for mortgage advisers

One of the biggest challenges emerging for mortgage advisers is insurance.

Squirrel Mortgages chief executive David Cunningham says mortgage holders need insurance to get a property, premiums are increasing dramatically in some places and in a minority of cases insurers won’t give coverage on properties at all.

Insurers have increased gross premiums by 20% and that has come through in the Consumers Price Index (CPI). For some properties, though, insurance premiums have doubled as insurers reweight risk.

“Insurance, its exclusions and cost will become a more challenging issue this year,” Cunningham says.

Whangarei-based Key Mortgages director and mortgage adviser Jeremy Andrews has come up against insurance issues already. A client who recently bought two properties can’t be insured because they had prior EQC claims. “Basically it meant the client couldn’t get mortgages as banks are not able to hold security over uninsured properties.”

The client was to own other properties to use as a bank security for the two uninsurable dwellings. However, in the future those properties can’t be bought with a mortgage by a first home buyer or somebody else as their primary home.

Andrews says obviously the insurance company saw the properties as too high a risk and if a client can’t get insurance they can’t get a mortgage. “Possibly a buyer in these circumstances can get away with land value, but even then, I think the insurance company would be reluctant to provide cover.”

Loss of deposits

Recently, the Law Society warned that some property buyers are losing their deposits after unknowingly entering agreements on flood-damaged houses. It says lawyers are seeing more people entering into legally binding sales and purchase contracts, only to find their bank will no longer give them the mortgage because the house is uninsurable. In many cases the buyer cannot get their deposit back - sometimes more than 100-thousand dollars. There are fears this is the beginning of a crisis across Auckland, Northland, Hawkes Bay and Gisborne.

Cunningham says it points to a wider problem with houses in earthquake prone areas, on flood plains and coastal or erosion zones. Squirrel recently had a client who lived next to a creek. While the insurer offered coverage, it also put a $5,000 excess on the policy for flooding.

“A lot more creativity needs to be thought of in terms of solutions, even though risk-based pricing is alive and kicking and getting difficult. It makes insurance much more expensive,” he says. “Where I live, for example. on the Kapiti Coast, insurance premiums have gone through the roof.”

The insurer said it was reweighting insurance regionally to better reflect risk and Cunningham’s premiums went up 96%. “There is nothing special about my property, it just happens to be nearest to the beach, although it is not beachfront.

“During a cost of living crisis people are seeing on average a 40% rise in their insurance premiums. Rates and insurance could be viewed as a tax on property ownership. Increasing insurance premiums feed into inflation, which causes the Reserve Bank to keep interest rates high.” 

Cunningham says Squirrel always advises clients to make their sale and purchase offer conditional on insurance and approval from the bank or lender.

“I suspect some of the deals the Law Society is warning about are the over enthusiasm of the buyer, where they just want the property so they go unconditional without confirming they have finance in place and the finance is dependent on insurance.

“A good adviser and a good lawyer always make sure a client has had the conversation about insurance. Buyers can go online and get an insurance quote. I did one recently and it came back, ‘sorry, we don't insure in this area’. That was a big alarm bell.”

Investors look more carefully

The massive increase in insurance costs together with significant rate rises are having a bearing on whether investors buy or not, Andrews says. “When you add those two figures into the overall cost of buying an investment property, it can have a big bearing on whether it's feasible or not. The cost of insurance is definitely something people are considering now. It is also a contributing factor in some investors deciding whether to keep their rental/s or not.”

Insurance costs are also creeping into banks’ serviceability tests. Westpac takes into account rates and insurance on specific properties and requests confirmation that insurance is secured before signing the final mortgage documents.

Andrews had one deal where the servicing figures were tight and the client had to look for cheaper insurance. “The bank wanted to specifically know the insurance cost and that it was not going to breach a certain amount.”

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