Through the roof

Have you left your house at risk of an insurance shortfall?

The cost of building a house has soared by as much as 40 per cent in the past two years. Unless your home insurance has kept pace, it’s likely you, and many other Australians, are significantly underinsured.

Even before COVID and the situation in Ukraine influenced the rise in building costs, the Insurance Council of Australia estimated about 80 per cent of Australians were not covered for the true costs of rebuilding.*

It’s not really something homeowners want to think about, with pressure on all sides from rising interest rates, insurance premiums and inflation. But, if the worst happens and you’re caught short on insurance, it can set you back decades.

Look for red flags

Some homeowners are at greater risk from underinsurance. Look for warning signs your home may be in this category.

• Do you live in a bushfire or cyclone zone? This not only means your property is at greater risk of total loss, but more stringent construction codes can add significantly to rebuilding costs.

• Have you renovated or landscaped without updating your insured amount?

• Is your home on a sloping block, or does it have access issues that could raise construction costs?

• How long is it since you reviewed and updated your policy valuation? Insurers usually raise the insured amount around 5-7 per cent each year. But in the past two years building costs have far outpaced this. A Choice magazine article cited the case of a Blue Mountains teacher who lost his home to bushfire in 2013 and was left shockingly out of pocket. He had insured his home for the estimated construction costs when he bought it in 1996 and had relied on his insurer’s annual 5 per cent increase in coverage to keep it current. His pay out was $370,000, but quotes to rebuild came in between $650,00 and $680,000. He was unable to rebuild and bought a cheaper property elsewhere.**

How to value your home

The average homeowner can’t be expected to stay abreast of rising construction costs. There are two main ways to put a realistic value on rebuilding.

Free online calculators: These can be contentious, with some quantity surveyors claiming they contribute to underinsurance issues.*** However, the Insurance Council of Australia recommends the Cordell Sum Sure construction calculator, which is built and maintained by real estate data firm

CoreLogic. According to CoreLogic, the Cordell Sum Sure is a real-time, live rebuild calculator that’s updated with materials prices, building code changes, and transport, storage, and wage costs.

It is based on postcodes, with users able to add high-level detail, such as the quality of finishings, floor area, and level of architectural design. A disclaimer on the ICA site states figures generated by the calculator are an approximate guide only and should not be taken as advice or a recommendation to acquire any product or level of insurance cover.

Quantity surveyor: This is considered the gold standard. Costs for having a quantity surveyor estimate the rebuild cost of your home can be upwards of $500. However, if you have a tricky location, or unusual home, it can be invaluable to give you a reliable costing. As opposed to valuers, quantity surveyors are experts on building costs, not what properties would fetch if sold. These can be two very different figures.

Surveyors recommend homeowners have their rebuild estimate reviewed every 3-5 years and after any renovation work.

Dos and d’ohs

When estimating the replacement cost of your home watch for common pitfalls.

• Don’t just subtract land value from total valuation to guesstimate the rebuild costs. The purchase price or valuation does not give you an accurate indication of rebuild costs because it won’t take into account things such as site access or fluctuating construction costs.

• Do remember that if your home is destroyed it can easily take one to two years to get building contracts in place. This means prices will continue escalating, so this needs to be factored in to the insured amount.

Keeping costs down

Everyone wants to be properly insured, but let’s be honest, we don’t want to pay a cent more than we have to. There are a few simple tips to save:

• Raise your excess: bumping your excess up from say $500 to $1000 can save hundreds, particularly if you rarely claim anyway. A Choice magazine analysis from this year found consumers could save 10-12 per cent in premiums for every $500 increase in their excess, with the sweet spot an excess of $1000-$1500.****

• Shop around: it doesn’t pay to be loyal when it comes to insurance. Look for insurers who offer discounts for bundling insurances – building, contents and car.

• Install alarms: advanced security and fire protection measures not only saves lives, they can save on premiums too.

* Underinsured and overexposed – Most Australians risk financial hardship through underinsurance, understandinsurance.com.au, 28 November 2017, https://understandinsurance.com.au/mediarelease/plain/1

** Vergnani, L. Are home insurance calculators accurate?, choice.com.au, 17 September 2018, www.choice.com.au/money/insurance/home-and-contents/articles/building-insurance-calculators

*** Wood, D. Rising building costs: Will they force insurers to use quantity surveyors, 14 December 2022. www.insurancebusinessmag.com/au/news/property/rising-building-costs-will-theyforce-insurers-to-use-quantity-surveyors-430515.aspx

**** Engel, P. How to save money on your home insurance, choice.com.au, 20 January, 2023. www.choice.com.au/money/insurance/home-and-contents/articles/how-to-save-money-onhome-insurance