What is equity in a house?
House prices in the current New Zealand market seem to be constantly on the rise. So, coupled with new Auckland capital valuations (CVs), you may be wondering whether you have enough house insurance.
Rising property prices
Apart from the rugby, surely there are fewer topics more popular around Kiwi watercoolers than the pros and cons of the housing market. And, if you’re lucky enough to own a home, tracking its upward trajectory can be a satisfying pastime.
For many of us, buying a home will be the most significant purchase we ever make. And, while we pay close attention to our growing assets, we often give little thought to the not-so-exciting sum insured amount of our homes.
What is sum insured?
Sum insured is a term insurance companies use for the maximum amount they will pay out should a home be in need of complete rebuilding following something like a natural disaster or fire. Sum insured is not the same as the amount you paid for your home, which includes the market and land value of your property at the time of purchase. Likewise, it also doesn’t reflect your home’s current market value.
Various government, business, and consumer groups have studied and reported at some point in recent years a percentage of homes in NZ being underinsured. Some reports have indicated that up to 75% of Kiwi homes are thought to be underinsured? It’s true—and worrying. So, while we understand that you may not think about the sum insured amount of your home as much as its market value, you can’t afford to overlook it.
A case study
Imagine this: You own a home with a market value of $1.2 million. Then, one night the unthinkable happens — due to a fire caused by faulty wiring, your house is burned to the ground. You take comfort, though, in the knowledge that you have house insurance. Several years ago, you selected a sum insured amount of $600,000, being the total cost to rebuild your home. Unfortunately, though, there have been significant cost increases over the years, and you are shocked to learn that the cost of rebuilding your home will be $800,000. Now you find yourself left with a $200,000 shortfall. What would you do? Dip into savings? Extend your mortgage? Downsize to a less expensive home?
Back to CVs
A capital valuation (CV) is an estimate by your local Council of your home’s likely selling price. Are CVs helpful for determining a home’s replacement value (sum insured)? No, simply because they include land and are the market value of your property at the time you bought it.
This, of course, begs the question: How can you work out the right rebuild cost for your home to know what to insure it for, and avoid nasty surprises?
Determining a Sum Insured
Depending on where you take out your house insurance, a few options may be given to you as to how to estimate an accurate Sum Insured for rebuilding your home in the case of a total loss. So, to ensure there isn't a financial shortfall should you need to rebuild your home, we recommend you do some research.
Here are some of the things you might want to consider:
Ten years ago, it may have cost $200,000 to build your home. The question is, what will it cost if you need to rebuild today? Without a doubt, the answer is likely to be considerably more.
This is applicable if you are updating your existing insurance policy. While there will be an adjustment for inflation, you need to think about what additions you have made to your property since you last selected a sum insured . For example, have you added any bedrooms? Have you built a fence or deck? Have you added a swimming pool or laid down a new driveway? You must account for all these additions, so dig out those invoices and consider the impact of these on the total cost to rebuild, or your Sum Insured.
When thinking about rebuilding your home, it is easy to overlook demolition. However, one of the first steps in the rebuilding process is pulling down what remains of your home. Though it takes less to demolish than build a house, there is still a significant cost to allow for. Here's what the demolition process can involve:
- inspecting the site for materials like asbestos
- deciding which parts of the house will remain
- removing debris
- transporting debris to a landfill.
Again, speak with a licensed builder or valuer to establish these costs.
A number of options exist for calculating your home insurance cover. Depending on who you get your insurance through, these may include:
Most insurers provide online calculators. Although helpful, these calculators are only estimates and are not intended to replace an expert valuation. They may not be 100% suitable for every home, so you may want to consider whether a calculator is right for you, especially if home is of high value or it’s large. You’re not bound to use the value arrived at in an online calculator given you know your home best. It may be the Sum Insured it arrives at is too low for your needs (or high!).
Any calculator will get you to consider things like the age, size, materials, and design of your home. Things like whether your property is on a slope, has retaining walls, a long driveway, and/or the costs that would be involved in demolishing the home (including professional fees and removing debris).
Use a Professional
If you want more confidence on the sum insured for your home, commissioning a valuation for insurance purposes through a valuer, licenced Builder or surveyor may be your preference.
Get the right protection for your home
Make sure you’re covered for sudden and accidental damage to your home with PremierCare Home Insurance.