What insurance does a lender need on the property securing your business loan?

When a property secures your business loan, the lender will generally want the building insured for its full rebuild cost, with a current policy and, where the insurer allows, the lender’s interest noted on it. You’ll usually send a certificate of currency before settlement and keep cover in place until the loan is repaid. Strata properties rely on the owners corporation’s policy instead.

It sounds like a formality, and most of the time it is. But insurance is one of the final conditions checked before a secured business loan settles, which means a missing certificate or an expired policy tends to surface at the worst possible moment. Here’s how to get ahead of it.

Why does a lender care about insurance on the security?

Because the building is part of what the lender is relying on. If you couldn’t repay, the lender expects to recover the debt from the property. A house that burns down uninsured leaves a block of land worth a fraction of what was lent against it. Insurance protects the value of the security, and in doing so it protects you: a damaged, uninsured property can leave you with no home, no asset and a debt that still has to be paid.

That’s why insurance shows up as a condition of almost every property-secured loan, whether it’s a first mortgage, a second mortgage behind your bank, or a caveat.

What will the lender usually ask to see?

The request is normally short:

• A certificate of currency for the building policy, showing the insured address, the sum insured, the policy period and the insurer.
• The lender’s interest noted on the policy, where the insurer offers that. Your insurer or broker can usually add it with a phone call.
• Confirmation the cover suits how the property is used, for example a landlord policy for a rental or a commercial policy for business premises.
• Renewal evidence during the loan, if the lender asks for it.

Who arranges the building cover depends on the property:

Property type	Who insures the building	What to send the lender
House you live in	You, under a home building policy	Certificate of currency for your building policy
Strata unit or townhouse	The owners corporation or body corporate	Certificate of currency for the strata building policy
Rented investment house	You, usually under a landlord policy	Certificate of currency showing landlord cover
Commercial premises you own	You or your property-owning entity	Certificate of currency for the commercial building policy
Vacant land	No building to insure	Usually none for the building; the lender may ask about public liability

Getting these documents together early is one of the simplest ways to keep a settlement date. If you’d like someone to look at the whole picture, tell us about your property and what the loan’s for.

How much should the building be insured for?

Enough to rebuild it. Moneysmart’s guide to choosing home insurance makes the point plainly: it’s important to cover the full cost of rebuilding so you’re not underinsured. It also warns that if you haven’t reviewed your cover for 12 months or more, “it’s easy to become underinsured”, because building costs keep moving.

Note that the rebuild cost and the property’s market value are different numbers. A city home’s value might be mostly land, while its rebuild cost is a fraction of that. A large rural house could cost more to rebuild than it would sell for. Lenders are generally looking for a sensible rebuild figure, not the market value.

Moneysmart also points out that building insurance covers the structure and fixtures, while your belongings sit under contents cover. For business premises, business.gov.au’s overview of types of business insurance lists building and contents insurance as cover for loss from events such as fire, storms or break-ins.

What if the property is in a flood, bushfire or cyclone area?

This is where insurance can genuinely slow a deal, so raise it early.

• Flood. Moneysmart warns that even where flood is included, damage to some parts of a house may not be covered. Read the policy’s definitions and exclusions, and expect a lender to ask what you have.
• Cyclone. The Australian Reinsurance Pool Corporation runs a cyclone reinsurance pool aimed at properties at high risk of damage from cyclone “and related flood”. It covers eligible home, residential strata and small business policies, including commercial property with a sum insured of $5m or less. It’s an arrangement between insurers and ARPC, so you still buy your policy from an insurer as normal.
• Bushfire. Premiums and excesses may be higher, and some insurers limit new policies when fire danger is high. Have cover bound well before settlement week.

Higher-risk locations don’t stop a property from being good security. They just mean insurance becomes a task to start on day one, not day ten.

What if the cover lapses partway through the loan?

Most secured loan contracts require the security to stay insured for as long as the loan runs, so a lapsed policy can technically count as a breach, even if nothing has gone wrong with the building. In practice, the risk is usually more mundane: a renewal notice goes to an old email address, the direct debit fails and nobody notices until something happens.

A few simple habits prevent it:

• Put the renewal date in the same calendar as your loan’s key dates.
• Check the sum insured at every renewal rather than letting it roll over unchanged.
• Send the lender the new certificate if your contract asks for it, without waiting to be chased.
• Tell the lender before you change insurers, so the interested party noting carries across.

What happens if the property is damaged during the loan?

Life happens. If a storm, fire or flood damages the security while the loan is running:

1. Contact your insurer as soon as practical. Moneysmart’s claims guide suggests doing this even before you know the full extent of the damage, and speaking to the insurer before paying for temporary repairs.
2. Tell the lender. The loan contract usually requires it, and lenders deal far better with damage they hear about from you than damage they discover.
3. Follow the contract and the policy on how claim money is paid and used. Usually it goes toward repairs that restore the security.

Illustrative example: the cyclone-season settlement

Illustrative example. A plumbing business in north Queensland wants $250k to buy out a competitor’s service contracts and two fitted-out vans. The owners offer a rented investment house as security, worth about $600k with $180k owing.

The lender’s conditions include a certificate of currency for the building with landlord cover and the lender’s interest noted. The owners’ policy was written years ago as a home policy from when they lived there. Because they raised it in the first week, their broker moves the house onto a landlord policy, updates the sum insured to a current rebuild estimate and notes the lender’s interest well before settlement. The deal settles on the planned date, and the owners have a policy that would actually respond if a cyclone hit.

Ready to put your property to work?

Insurance is usually the easiest condition on a secured business loan to clear, as long as it’s done early. If you’ve got property with equity and a clear business purpose, we can look at the rest. Property-secured business loans run from $20k to $5m, across homes, investment properties and commercial premises; the home equity business loans and commercial property loans pages cover the main routes.

Enquiring takes about 60 seconds, with no credit check when you first enquire. We don’t send your details to a pile of lenders, so there’s no flood of calls. A real person reviews your property, its existing loan and what you need the money for, then calls to talk it through. Please fill in the form accurately, including how the property is used, so we can line up the right lender and the right insurance questions first time.

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