What insurance does a lender need on property used as loan security?

When owners think about using property to secure a business loan, they think about value, equity and what’s owing. Insurance barely rates a mention, until the solicitor asks for a certificate of currency the day before settlement and the policy turns out to be in the wrong name, or lapsed, or nowhere to be found.

It’s an easy thing to get right if you look at it early. This guide covers what lenders usually ask for, how the answer changes for strata, vacant, tenanted and part-built property, and the small mistakes that hold up funds.

Why does a lender care about your insurance?

A secured loan relies on the property being there if the loan needs to be repaid from it. For land with a building, much of the value is the building itself. If it burns down or is wrecked by a storm and isn’t insured, the security could be worth a fraction of what it was the day before.

So a lender wants three things: that the building is insured, that it’s insured for enough to rebuild, and that the lender will know if a major claim is made. That’s why building insurance is a standard condition in a Letter of Offer for secured loans. Our documents checklist for a private mortgage includes it alongside ID, rates notices and loan statements.

What does a lender usually ask for?

Every Letter of Offer sets its own conditions, but the usual list looks like this:

• Building insurance on any property with a building on it.
• Full replacement cover. Moneysmart makes the point that the sum insured should cover the full cost of rebuilding, including extras such as demolition and rubbish removal, so you aren’t underinsured. Lenders want the same.
• The right insured name. The policy should be in the name of the registered owner, which may be a company or trustee rather than you personally.
• The lender’s interest noted. Your insurer records the lender as mortgagee or interested party.
• A certificate of currency showing the policy is current, issued by the insurer, before funds are released.

business.gov.au describes building and contents insurance as covering damage or loss from events including fire, storms or break-ins, and public liability insurance as covering injury or property damage caused through your negligence. For business owners using commercial premises as security, both are usually already in place; the job is just to check the details match.

How does the answer change by property type?

Property type	Who usually insures the building	What a lender typically wants to see
House or standalone commercial building	The owner	Owner’s building policy, lender noted, certificate of currency
Strata unit, townhouse or strata commercial unit	The owners corporation or body corporate	Certificate of currency for the scheme’s building policy
Tenanted commercial property	Usually the owner (tenant covers its fit-out)	Owner’s building policy; sometimes the lease, to confirm who insures what
Vacant land	No building to insure	Usually no building cover; public liability is sensible
Vacant building	The owner	Building policy that covers vacancy; check unoccupancy clauses
Part-built property	The builder or owner, depending on the contract	Contract works or construction cover for the stage of the build

Strata property is often the quickest, because the scheme already holds the building policy. Ask the strata manager for the certificate of currency.

Vacant buildings need more thought. Many policies limit cover when a building is unoccupied for an extended period, which matters if your security is a factory between tenants. Our page on vacant commercial property loans covers lending on empty buildings; the insurance needs to match.

Part-built property usually needs construction-stage cover, which is different from ordinary building insurance. If that’s your situation, raise it at the start.

If you’d like to know what will be needed for your property before you call your insurer, ask us in your enquiry.

What insurance mistakes hold up settlement?

These come up again and again, and every one is avoidable:

1. Wrong name. The property is owned by a family trust’s trustee company, but the policy is in a director’s personal name.
2. Lapsed policy. Premiums were missed during a tight cash-flow month and the policy quietly ended.
3. Old sum insured. The policy reflects the building’s cost years ago, not today’s rebuild cost. Moneysmart suggests reviewing cover at renewal to allow for inflation and changes to the property.
4. Wrong property. After a subdivision or boundary change, the policy address doesn’t match the title.
5. Missing interest. The lender wasn’t noted, so the insurer has to reissue the certificate.

None of these is hard to fix, but each can take a day or two if it’s discovered late. Our fastest loans fund in as little as 24 hours from a clean, complete application, and insurance that’s already in order is part of what makes an application clean.

Illustrative example

Illustrative only. The business and figures are invented.

A Hobart café owner applies for a $220k second mortgage over a shop with a flat above, owned by the family trust. Everything else is ready, but the insurance certificate shows the owner’s personal name and a sum insured set eight years ago.

The owner calls the insurer the same afternoon. The policy is reissued in the trustee company’s name, the sum insured is lifted to a current rebuild estimate, and the lender is noted as an interested party. The updated certificate of currency arrives the next morning, and settlement goes ahead as planned. Interest is capitalised for the first 6 months, so the café’s cash flow isn’t touched while the money is put to work.

What do you need to do while the loan is running?

Insurance isn’t a one-off box to tick at settlement. Most loan agreements expect the property to stay insured for as long as the loan is in place, so a few habits help:

• Keep paying the premium. If cash is tight, a premium is easy to let slide, and a lapsed policy can put you in breach of the loan terms as well as leaving the property exposed. Consider a reminder a month before each renewal.
• Tell the lender about a major claim. If the property is badly damaged, the lender will want to know, and its noted interest means the insurer may contact it anyway. Talking early keeps everyone working towards the same outcome.
• Update the policy if things change. A new tenant, a period of vacancy, renovations or a change of ownership structure can all affect cover. Moneysmart’s advice to check the product disclosure statement for exclusions and limits is just as relevant for an owner of business premises.
• Keep the certificate handy. If you refinance, extend or sell, the next lender or buyer’s solicitor will ask for it too.

Does insurance affect what you can borrow?

Not directly. We assess value ourselves, without a sworn valuation, and the amount depends on the property’s value, what’s owing and your exit, up to 80% of value on residential security and up to 70% on commercial. Insurance is a condition of the loan rather than a factor in its size.

What insurance does affect is whether the loan settles on time. And if you’re borrowing because an insurance claim is taking too long to pay out, that’s a different question. Our page on funding the gap while an insurance claim is assessed covers it.

Ready to put your property to work? See if you qualify

Insurance is the dull part of a secured loan, and that’s exactly why it catches people out. Get it squared away at the start and the rest of the process gets to move at full speed.

Our loan check takes about 60 seconds. There’s no credit check at that stage, so asking won’t affect your credit file. Your details go to one direct lender, not farmed out to a crowd, and a real specialist reviews your situation and calls you. Please tell us accurately who owns the property and what’s on it. Those details determine what insurance we’ll ask for, and getting them right first time saves a day at the end.

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