Before you begin building a new house, it’s critical that you check that it will be properly covered during its construction. It’s not just about protecting your asset, but also about reducing your financial risk too.
Without insurance, banks won’t lend: period. Even if you’re in a financially strong position and don’t need a loan—perhaps you’ve already sold your current home—you still must have insurance. Moreover, it is very difficult to find a policy that covers a build that has already commenced, so always make sure it’s organised well before construction starts.
To help you ensure your are properly covered, here is a summary of what insurances you should consider when building a new home:
Builders’ Risk Insurance
Also known as Contracts Works Insurance, this cover is essential for every new build. It protects against the common construction risks, including:
Damage done by subcontractors.
Theft, vandalism and arson.
Damage from natural disasters (e.g. earthquakes, floods and storms).
Note: Builders’ Risk Insurance does not cover:
Any existing property on the site.
Earthworks and foundations.
You will need to present confirmation of this insurance to your bank before they will lend to you.
Tip: Add an extra couple of months to your insurance policy as contingency against any construction delays. While you can get an extension to your policy, it often costs more.
It’s easy to focus on your new asset and forget about your old one. However, if you’re using your current home’s equity to secure funding for your new build, you need to make sure it’s adequately protected. Events such as fire, natural disaster, and even burglary, can cause significant damage to your current home’s value, which could hurt your pocket when you come to sell.
Mortgage, Income and Life Insurance
More and more banks are requiring homeowners to have some form of financial protection in place to ensure their loan continues to get repaid, even in the event of accident or illness of the mortgagee(s). Mortgage, income and life insurances will allow homeowners to continue to service their mortgage in the event of a death, accident or illness of the household’s key breadwinner(s).
While all new builds are covered for 10 years under the Building Act Warranty, it won’t cover any defects if the build company you use closes. Moreover, according to Shine Lawyers, nearly 75 per cent of New Zealand building companies fail within 10 years. To this end, many homeowners choose to take out third-party guarantees that provide a 10-year cover that sticks, even if their build company goes out of business.
Important! Bear in mind that the cost of the guarantee is usually indicative of the extent of its cover. A $500 guarantee, for example, is unlikely to have adequate cover for a $700,000 build.
This 10-year guarantee comes with two cover options: full contract ($1,000 to $1,200) and carpentry labour only ($600 to $700). It’s transferable too, meaning that if you choose to sell your home, the new owner is covered by the same guarantee.
The 10-year guarantee that the Registered Master Builders provide comes in three levels. The 10-Year Kiwi Guarantee for work under $100,000; the 10-Year Standard Guarantee for builds under $400,000; and the 10-Year Premium Guarantee for builds up to $1,000,000. They cost $500, $1,300 and $2,950 respectively. Like the NZCB guarantee, the Registered Master Builders guarantee is also transferable.
This guarantee covers:
Loss of deposit (up to 10 per cent of the contract to a maximum of $500,000).
All claims over 10 years (up to $1,000,000).
Non-completion (up to 20 per cent of the contract to a maximum of $500,000).
Materials and workmanship for 2 years.
Structural defects for 10 years.
Temporary accommodation cover if remedial work is required (up to $10,000).