When you start the process of buying a home, and applying for a mortgage, you will likely be asked whether you have certain insurance policies in place. If you have bought a house before you will probably have experience with a lot of these already. If you are a First Time Buyer, it may surprise you that you are expected to have insurance in addition to the other costs of buying a home.
If you are worried about the cost of buying, or you are just trying to keep the costs down, you may be wondering whether you need this insurance, or whether it’s a cost you can avoid.
Do I need insurance?
Technically the answer here is no. You are not required by law to have insurance such as buildings or contents insurance in place before you buy a home.
However, your mortgage lender will most likely refuse to accept your mortgage application without having at least buildings insurance. You will therefore find it almost impossible to secure a mortgage without taking out buildings insurance.
Which means some form of insurance policy is an unavoidable cost when buying a home, and you will need it.
Why do I need insurance?
Insurance is a necessary cost for the benefit of two people: you and your mortgage lender.
The most important person insurance will benefit is, of course, you. The purpose of insurance is to protect against any possible problems that the future may hold for you. For example, if an accident destroys part of your home, you get made redundant or end up with a dreadful illness. Unforeseen circumstances like these can have a devastating effect on your finances. With insurance, large pay-outs can be avoided by making claims, easing your money troubles and keeping you afloat.
As we said before, a mortgage lender will require you to have insurance before they will let you have a mortgage. This is because they need to ensure that they will get the money they lent you back, which means you need to be able to keep up with your repayments. If something happened and you lost a lot of money, you may fall back on repayments. Insurance assures the lender that, no matter what the circumstances, you will have the income to meet their needs.
What insurance should I get?
Buildings insurance - This is the big one, the insurance that lenders will make sure you have before accepting your application. Buildings insurance protects your property from any accidental damage that is beyond your control. This can be anything from fire, to flooding, to vehicle collisions. A buildings insurance payout will help you rebuild and repair your home. Learn more about buildings insurance.
Contents insurance –
contents insurance is the other key policy to have when buying a home. Some lenders may also require you to take this out as well. Contents insurance protects the belongings within your home, from furniture to clothing to electronics, from accidental damage similar to buildings insurance. Learn more about contents insurance
Home insurance -
one common option when taking out insurance is a combined bundle of both buildings and contents insurance. This will commonly be known as home insurance. It will be your best option if your lender requires you to have both.
Other insurance to consider
Life insurance -
life insurance will pay out a lump sum in the event of your death. This way your mortgage can be paid off and it won’t leave your relatives or loved ones with your debts.
Critical illness cover -
this insurance will pay out a lump sum if you end up suffering from a serious illness such as a stroke or a cancer diagnosis. This can help you continue to pay for a mortgage if the illness takes you out of work for an extended period. It can sometimes be paired with a life insurance policy in a bundle.
Income protection -
this insurance policy is to ensure that you continue to have some kind of income if you get made redundant. It will help you ensure you can make all your payments, like your mortgage, until you find some more work. It can last for any length of time you decide to pay for, from a year, all the way up until your retirement.
Mortgage Payment Protection -
this insurance, similar to income protection and critical illness, is designed to cover you if you lose income from redundancy or illness. However this policy is specifically taken to focus on keeping up with mortgage payments, where’s other insurance pay-outs could be used towards other needs. You will likely be offered this by your lender but remember you don’t have to use theirs - you can shop around for deals.
When buying a home, you can choose to take out as many different types of insurance as you like, and you could afford. As long as you remember to get buildings, and likely contents, insurance you should be able to successfully secure a mortgage.
Remember, as always, to make sure you compare different insurance companies and their policies before settling on one. This way you can find a deal that works well for you and can keep your costs down.
You should also bear in mind however that, though you don’t have to go with the insurance your mortgage lender recommends, they will have to approve your choice, so it’s worth looking for multiple options.