Why Your Home Loan Lender Might Require Property Insurance?
Buying a home is one of the most significant financial commitments that most people make. When you take out a home loan, the lender assumes a substantial amount of risk. To mitigate this risk, lenders often require you to purchase property insurance. While not legally mandatory for homeowners, it is a standard condition in home loan agreements.
In this article, we explain why lenders insist on it and how it protects both your home and their interests.
What Is Property Insurance?
Property insurance is a type of general insurance that provides financial protection against damage or loss to your residential property. It offers coverage for both the structure and the contents, depending on the chosen policy.
You can typically choose from the following types:
⦁ Building Insurance: Covers the physical structure
⦁ Contents Insurance: Covers personal belongings
⦁ Comprehensive Insurance: Covers both the building and contents
Why Do Lenders Require Property Insurance?
Lenders have a financial interest in the property until the home loan is fully repaid. Property or home insurance ensures that this interest is protected in the event of unforeseen circumstances.
1. To Protect the Collateral
The home you purchase acts as the collateral for the loan. If the property suffers damage due to fire, flood, or any other natural disaster, it may lose significant value.
Insurance provides financial coverage for repair or reconstruction, helping maintain the value of the lender’s asset.
2. To Prevent Loan Default
Major property damage can lead to significant financial stress for the borrower. This may impact their ability to repay the loan on time.
If the property is insured, the claim amount can help the borrower manage repair costs while continuing loan repayments without disruption.
3. To Ensure Smooth Recovery Process
In the event of damage, insurance ensures a quicker and more structured recovery. It also simplifies the process for both the borrower and the lender.
A smooth recovery helps retain the property’s market value, which is beneficial for the lender.
What Does Property Insurance Typically Cover?
Property insurance offers protection against several common risks that can cause substantial damage to your home. It shields you from high out-of-pocket expenses in emergencies.
Common inclusions are:
⦁ Fire, lightning, and explosions
⦁ Natural calamities such as earthquakes, floods, and cyclones
⦁ Theft or burglary
⦁ Damage due to riots or vandalism
⦁ Falling trees or electrical poles
⦁ Burst pipes or plumbing issues
Additional coverage may include:
⦁ Protection for home appliances
⦁ Cost of temporary accommodation
⦁ Personal accident insurance for the homeowner
What Is Not Covered in Property Insurance?
Understanding exclusions is just as important as knowing what is covered. Most insurers exclude the following situations:
⦁ Normal wear and tear
⦁ Damage caused by pests such as termites
⦁ Loss due to negligence or poor maintenance
⦁ Unauthorised construction
⦁ Deliberate damage by the homeowner
⦁ Valuable items not specifically listed in the policy
Always read the policy document to know the exact terms and exclusions before purchasing.
Can a Lender Insist You Buy Insurance From Their Partner?
Lenders may suggest an insurer or offer to include the insurance in your loan package. However, you are not legally bound to buy from their partner.
You have the right to choose any IRDAI-registered insurer as long as the policy meets the lender’s criteria. It is advisable to compare policies for the best coverage and premium for property or home insurance.
What Happens If You Don’t Buy Property Insurance?
Failing to purchase property insurance can lead to complications during the loan process. The lender may take corrective measures to secure their risk.
They may delay loan disbursement, impose a higher interest rate, or buy a policy on your behalf and add the premium to your loan account. To maintain control over policy terms and costs, it is best to arrange your own insurance.
How Much Does Property Insurance Cost?
Property insurance premiums are relatively low when compared to the value of the home. The cost depends on several factors.
Premiums are calculated based on:
⦁ Sum insured (typically the cost to rebuild the house)
⦁ Location and age of the property
⦁ Construction type and safety features
⦁ Extent of coverage and add-ons
For example, a home with a reconstruction cost of ₹1 crore may have a yearly premium ranging from ₹3,000 to ₹6,000, depending on the coverage chosen.
How to Select the Right Property Insurance?
Selecting the right policy ensures adequate protection and peace of mind. Here are the key factors to consider:
⦁ Coverage Amount: Ensure the sum insured reflects the reconstruction cost, not the market value
⦁ Policy Type: Choose from structure-only, contents-only, or comprehensive cover
⦁ Add-On Covers: Look for extras such as earthquake protection or cover for appliances
⦁ Claim Settlement Ratio: Opt for insurers with a good track record of claim settlement
⦁ Clear Understanding: Know the exclusions and terms before making a decision
Property insurance is a vital tool for protecting your home and finances. While it may be a loan condition from your lender, it also benefits you directly by offering financial support during crises. Rather than viewing it as a mandatory expense, treat it as an investment in safeguarding your most valuable asset. Take time to understand the policy options, choose the right coverage, and ensure that both you and your lender are protected throughout the loan tenure and beyond.
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