I know I have most likely spoken to you about this before, and like most people that believe things will never change, we find it easier to bury our heads in the sand. However, it’s all about understanding risk .
On Wednesday 12th July members of the major banks spoke to spoke to the ‘House of Representatives’ standing committee on economics. The committee asked them about the increasing costs of home insurance and what their (the banks), oversight was in terms of maintenance of policy around this risk. Senior representatives of NAB & CBA stated that more needed to be done to ensure that appropriate insurance cover was maintained on mortgaged property. Obviously this is important for not only the banks and borrowers but also for the strength of our financial system.
Borrowers have to take out insurance over their homes with the lending institution noted as an interested party, prior to or on settlement of their loan used to purchase the home. However, throughout the loan, there is often no following up of these insurance policies to ensure they have not lapsed. It’s not a current internal monitoring requirement for lenders to do this. Due to greater frequency of fire and/or flood resulting from climate change, causing increasing premiums to reinsure, it’s possible that borrowers (home owners) will allow their policies to lapse. That then creates risk to all stakeholders. Remembering that major banks carry a great investment in residential mortgages.
Within the terms and conditions of home loan contracts there is a clause that states that the borrowers (mortgagors) must maintain sufficient and suitable insurance cover over the property, but that’s in the fine print. It also states that lenders can pay the insurance premium payment on behalf of the borrower and bill them accordingly. In this circumstance that could mean increasing the loan? Because there is no current monitoring on an ongoing basis, there is a risk that some mortgaged homes are currently uninsured. Cost of living increases, exacerbated by twelve interest rate rises have made the general public cut back in many areas of consumption. It stands to reason that some borrowers will have let policies lapse. The simple solution for lenders will be to reintroduce annual monitoring, as it was when I first started in banking in the late 1970’s.