Avoid home underinsurance

What is home underinsurance?

Underinsurance means your insurance policy does not cover the full cost to rebuild or replace your home and contents. The key measure is rebuild cost, not what your property could sell for.

For example, if it costs $600,000 to rebuild your home but you are insured for $400,000, you’ll need to fund the $200,000 shortfall yourself if a major event occurred.

Underinsurance is a common issue in Australia with estimates suggesting that over 800,000 Australian homes are uninsured or underinsured. Underinsurance can also affect partial damage. Some policies include an “average clause” or coinsurance, which can reduce payouts if your home is insured for less than its true rebuild cost. This means even smaller claims may not be paid in full.

Why underinsurance is a risk if you have a mortgage

If you have a mortgage and your home is badly damaged, underinsurance can create two problems at once.

• First, your mortgage usually remains in place even if the home is unliveable. Repayments can still be due while you are sorting out repairs, builders and insurance claims.
• Second, if your insurance payout is not enough to rebuild, you may need to cover the gap from savings or other funds.

This shortfall can affect the choices you can make. Some homeowners delay rebuilding because they cannot afford the extra cost straight away. Others feel forced to make cheaper building choices to finish the job. In a stressful time, that can mean living in temporary accommodation for longer or juggling more bills than expected.