Property Insurance Requirements for Home Loans in Australia: What You Need and Why

What Insurance Does Your Home Loan Lender Require?

Your lender requires building insurance (also called home building insurance or home insurance for the structure) to be in place by the date of settlement. The lender must be noted as an 'interested party' on the policy — meaning the insurance company will notify the lender if the policy is cancelled, lapses, or is materially changed.

Minimum cover: The policy must cover the full replacement cost of the building — the cost to demolish and rebuild the property to its current standard if it were completely destroyed. This is not the market value or the purchase price — it is the cost of physically rebuilding the structure.

Insured events: Standard building insurance policies in Australia cover fire, storm, lightning, explosion, impact damage (e.g., vehicle or fallen tree), vandalism, theft-related damage, burst pipes and water damage, and earthquake. Flood cover is typically optional (and may be excluded in high-risk flood zones). Some policies also include accidental damage and motor burnout.

What building insurance does NOT cover: Contents (furniture, appliances, clothing, personal items), routine maintenance and wear-and-tear, damage caused by your own negligence, damage from pests (termites, borers), and some natural disasters depending on the policy (flood, actions of the sea).

Strata properties: If you purchase a unit, apartment, or townhouse within a strata scheme, building insurance is arranged by the body corporate (owners corporation) — not by you individually. The body corporate policy covers the building structure and common areas. However, you are responsible for contents insurance (covering your belongings) and may want to consider strata title insurance for fixtures and improvements within your lot.

When must insurance be in place? Building insurance must be activated from the date of settlement (when you take ownership). Many borrowers arrange insurance to start from the date of exchange (contract signing) to protect against the property being damaged between exchange and settlement — a risk you bear as the buyer in most states.

• ✓Building insurance required from settlement date (or exchange date)
• ✓Must cover full replacement cost — not market value or purchase price
• ✓Lender must be noted as an interested party on the policy
• ✓Standard cover: fire, storm, lightning, impact, vandalism, water damage
• ✓Flood cover is often optional — check and add if in a flood-prone area
• ✓Contents insurance is separate and not a lender requirement
• ✓Strata properties: building insurance is managed by the body corporate

How to Calculate Your Sum Insured (Replacement Cost)

The 'sum insured' is the maximum amount the insurance company will pay if your property is destroyed and needs to be rebuilt. Getting this figure right is critical — underinsurance means you pay the difference out of pocket; overinsurance means you pay higher premiums unnecessarily.

How to estimate replacement cost:

Use the Insurance Council of Australia's online calculator (understandinsurance.com.au) — it estimates rebuild costs based on your property type, size, construction materials, and location.

Multiply the building area (in square metres) by the average per-square-metre build cost for your area and property type. As a rough guide in 2026: standard brick veneer house: $2,000–$2,800/sqm. Weatherboard or timber house: $2,200–$3,000/sqm. High-quality or custom build: $3,000–$5,000/sqm. Basic unit interior rebuild: $1,500–$2,500/sqm.

For a standard 200sqm brick veneer house: 200 × $2,400 = $480,000 estimated replacement cost. Add 10–20% for demolition, site clearance, council fees, temporary accommodation, and inflation buffer: $480,000 × 1.15 = approximately $552,000 recommended sum insured.

Important: The replacement cost is NOT the market value. A property worth $900,000 (largely driven by land value) may only cost $500,000 to rebuild. Conversely, a property on cheap land in a regional area worth $350,000 may cost $400,000+ to rebuild if construction costs are high. Always base your sum insured on rebuild cost — not market value.

Review annually: Construction costs increase over time. Most insurance policies include an annual CPI-based increase to the sum insured — but this may not keep pace with actual build cost inflation. Review your sum insured every 2–3 years and adjust if necessary.

Insurance for Investment Properties and Strata Titles

Investment property insurance (landlord insurance):

If your property is an investment (rented out), standard building insurance covers the structure — but you should also consider landlord insurance, which provides additional cover specific to rental properties:

Loss of rent: Covers rental income lost if the property becomes uninhabitable due to an insured event (fire, storm damage, etc.). Typically covers 52 weeks of rent.

Tenant damage: Covers intentional or accidental damage caused by tenants — beyond normal wear and tear. Some policies cover malicious damage (intentional vandalism by tenants).

Rent default: Covers lost rental income if a tenant stops paying rent and remains in the property during the eviction process. This can take 4–12 weeks depending on the state's tenancy tribunal.

Public liability: Covers legal liability if a visitor or tenant is injured on the property due to a defect or hazard (e.g., broken step, loose railing).

Landlord insurance premiums vary from $300 to $1,500 per year depending on the property value, location, and level of cover. The premiums are tax-deductible as a property investment expense.

Strata insurance:

For units, apartments, and townhouses within a strata scheme, the body corporate arranges building insurance for the entire building — covering the structure, common areas, and shared facilities. This cost is included in your strata levies.

However, body corporate insurance typically does not cover: your personal contents, fixtures and improvements you have made within your lot (e.g., renovated kitchen, new bathroom), or personal liability. You need separate contents insurance and may want lot owner's insurance to cover your internal improvements.

Your lender may request evidence of the body corporate's insurance policy (including the sum insured and the policy number) as part of the settlement process. Your conveyancer can obtain this from the strata manager.

• ✓Landlord insurance: covers loss of rent, tenant damage, rent default, public liability
• ✓Landlord insurance premiums: $300–$1,500/year (tax-deductible for investors)
• ✓Strata: body corporate arranges building insurance for the whole building
• ✓Lot owners need separate contents and internal improvements insurance
• ✓Lender may request body corporate insurance details at settlement
• ✓Flood, earthquake, and action-of-sea cover may require separate add-ons