Consider this before buying fire insurance with your mortgage

In late June 2016 Mercer, one of the world’s largest business consulting firms, released the 2016 version of their annual Cost of Living report. Unsurprisingly, the city at the top as the most expensive place to live is Hong Kong. While there are a number of drivers behind this ranking, it is real estate that is the single biggest reason Hong Kong is so expensive to live in. These days, if anyone wants to purchase a home in the city, they are going to have to take out a mortgage. If you are considering purchasing property in Hong Kong there are a number of things you need to be aware of when it comes to your mortgage, including how it links with fire insurance.

How are insurance and mortgages linked?

When it comes to securing a property mortgage, the vast majority of banks will require that you also secure specific insurance policies (most commonly fire insurance). For example, according to the HSBC, “To protect your property from depreciation caused by structural damage resulting from disaster during the mortgage loan period, you are required to arrange fire insurance with an insurance company acceptable by us to provide coverage for replacement cost to reduce the potential loss.”

Simply put, if you do not secure fire insurance when looking at a mortgage, you will more than likely not be granted the mortgage. Luckily, the banks offering property mortgages do offer fire insurance, often bundling it with the mortgage. This, however, may not always be the best option.

Should I get fire insurance through the bank?

The answer here will largely depend on a number of variables that you, as the person considering the mortgage, need to consider. First and foremost, it is important to point out that the majority of fire insurance plans offered by the bank meet only basic requirements.

What we mean by this is that the plans will usually only cover the permanent structures of the building e.g., walls, roof, floor, pipes, etc. While this may be enough for some homeowners, especially those who will be renting the flat out, it likely won’t be enough to meet the needs of people who plan to live in the home. If you do go with basic coverage only, and there is a fire, there is very little chance that your valuables and possessions will be covered by the plan.

The second major variable to consider is the premium charged. In our experience, the premiums charged for fire insurance offered by the bank are often on the higher end of the spectrum when compared to other plans available.

How can I secure the best fire insurance?

Here are five things to do when looking for fire insurance coverage for a new mortgage.

1. Consider what you will be using the property for - This is important as it could dictate whether you will need to secure full coverage for the building and all assets, or whether basic coverage will be enough.

2. Read the plan details offered by the bank - Because banks offer many different types of insurance coverage, the fire insurance included with your mortgage may be enough. It is therefore, important to review the plan details and terms and conditions offered by the bank. This will also give you a clearer understanding of exactly what is covered should there be damage to the building from fire.

3. Consider what you need covered - Some fire insurance plans can have riders added to them that extend coverage to possessions, and even cover damage from water or nature. It is important to consider all of this before settling on a plan, as some fire insurance policies may not allow coverage to be extended once they have been secured.

4. Ask the bank what they require in terms of fire insurance coverage - What we mean by this is that most of the banks in Hong Kong have set requirements for fire insurance coverage that must be met by any plan secured in order for the mortgage to be issued. If you are considering securing fire insurance from a third party (not the bank) then you are going to need to make sure the coverage meets the bank’s requirements.

5. Compare prices of other plans - Finally, before you agree to any plans from the bank it would be a good idea to talk with the experts at Kwiksure. Because we work with all of the top insurers in the city, we can often find you fire insurance coverage that is not only comparable to that offered by the bank but may have a lower premium.

If you are in the process of securing a mortgage, visit our website today to learn more about Fire insurance, or click here to purchase your plan today.