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Becoming a homeowner means you need to think about a variety of different insurances. Kay Hill has the lowdown on what you might need

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When you buy a home, and even before that in some cases, there are several insurance products you will need to think about, to protect yourself, your property and your family.

Buildings Insurance

Probably the most important, this insurance protects the structure of your home, plus anything that’s permanently fixed to it, like a fitted kitchen, wooden floor, bath or toilet. If you are buying a freehold property your mortgage company will insist you take out buildings insurance, which must be in place for exchange of contracts (even though you don’t legally own the house at that point, you are legally committed to buy it). The price of the insurance is based on the rebuild cost of your home (which can be found on your surveyor’s report or using the online calculator at calculator.bcis.co.uk), and is usually less than the purchase price. Your mortgage company will need to be named on the document as having an ”interest” in the property. With a leasehold property it is the freeholder’s responsibility to arrange buildings insurance, although you will normally pay for it via a service charge.

Contents Insurance

Contents insurance covers everything else in the home that isn’t permanently fixed, including carpets, curtains, appliances, clothes and furniture. You aren’t required to have this, but imagine the absolute worst happened – a fire or flood – could you afford to replace all the essentials?

As well as the basic cover for specific incidents that affect your property at home, there are other important “extras” that you might want to add on to your contents insurance. For example:

 Personal property away from home (sometimes called “all risks” or “personal effects”). This covers items that you are wearing or might carry, such as jewellery, laptop, phone, purse and handbag, camera, headphones etc, and usually covers them for loss or damage

The FCA has written to insurance company CEOs urging them to do all they can to protect their customers by working with them to make sure they are in the right products and not incurring any extra fees. Those customers who are in dif culty should be helped so that they don’t cancel much-needed cover. Lower income households already tend to have less insurance and they often pay higher premiums. The HL Savings and Resilience Barometer shows only 43% of households have adequate life insurance cover for instance and this drops to just 27% of lower income households. There’s concern that as in ation continues to rise people may target insurance as their next spending cut. It may be tempting for people to save money today by cutting back on insurance cover. However, doing this can have much bigger nancial consequences. One example could be cutting back on income protection and then losing your job. The potential to exacerbate nancial problems is huge and people could nd themselves in the awful position of nancial worries affecting their health which can then make these worries even worse.

Helen Morrissey, Analyst, Hargreaves Lansdown

as well as theft. You may have to declare items individually if they are worth more than a certain amount.

 Bicycle cover. Most contents insurance only covers your bike if it’s indoors at your home, or sometimes locked in your garage or shed. If you leave it in a communal bike store or want to be insured when it’s at work, then you will need this additional insurance.

 Legal expenses. These policies provide you with access to legal advice and help with a variety of issues, not just home disputes, including personal injury, problems at work and medical negligence. It can be useful, but check there’s no overlap with other insurance policies.

 Accidental damage. This covers things that you (or your kids) might accidentally do, like knocking a paint pot over on the carpet. It can be quite costly, so consider how accident prone you are!

 Home emergency cover. This provides advice in an emergency such as roof damage, leaking plumbing or lost keys, plus a fixed amount towards the cost of professional help and alternative accommodation. Again, it can be expensive, so if you are a competent DIYer or have family who could help in a crisis, you may not feel you need it.

It is generally cheaper to buy a combined policy that covers both buildings and contents, often called just Home Insurance.

As well as insuring your home, you need to consider how you, or your partner, would cope with the new burden of mortgage payments if you lost your job, or became ill.

Life Insurance

Many mortgage lenders will insist that you have life insurance to cover the amount of your mortgage (but you don’t have to buy it from them). The cheapest option is to take out a policy for the term of the mortgage, or if you are buying jointly, a “joint life, first death” policy which pays a lump sum when either in a couple dies, sufficient to pay off the mortgage. You can, of course, insure your life for more than the outstanding mortgage, which might be appropriate if you are the main or only wage earner.

Critical Illness Insurance

This provides you and your family with a lump sum payment if you become critically ill with a specified condition such as cancer, heart attack or stroke. You could pay off, or reduce your mortgage, make alterations to your home or to supplement other income. If you are considering this type of cover you must be very careful to declare every illness, ailment or doctor’s visit as claims are often refused because of non-disclosure.

Income Protection Insurance

Also known as “permanent health insurance”, this replaces up to 60% of your income if you can’t work because of illness or injury, and can pay out every month until retirement if necessary.

Mortgage Protection Insurance

This is designed to pay your monthly mortgage for a fixed period of time, usually a year, in specific circumstances such as being unable to work because of illness or an accident or being made redundant.

All of these financial insurances can be complex and often expensive, so it’s important to make sure the product is right for you – an insurance broker can help you work out the best options.

Insurance Buying Principles

Shop around: While the days of huge introductory offers are over, shopping around can still shave money off prices. Use the major comparison sites as well as checking companies like Direct Line that don’t use them. In some jobs, you may find insurance products offered by your union or employer. Expect to spend time doing this – and diary in a reminder to do it again next year three weeks before renewal, as you should never renew without checking! Read the details: Yes, it takes ages, but it’s really important to look at the policy document carefully, as insurers vary wildly in what is covered and what isn’t. Use the Defaqto Star Rating as a guide – a 5-star policy will be very comprehensive, while a 1-star will be a basic product. You may find, however, that with a higher starred home insurance policy you are paying for things you don’t need, like high value contents, garden cover, outbuildings etc, so find a policy that suits your needs.

Be honest: Never underinsure, check rebuild costs and do a room-by-room totup of your possessions and what it would cost to replace them new. If, in the event of a claim, your insurer visits and finds you have underestimated, they will deduct a percentage of your claim. Don’t conceal pets or criminal convictions, fib about how close your house is to trees or waterways or lie about your locks, as the repercussions could be serious. The same is true of financial insurances – don’t gloss over any health issues you have had, or fail to mention that you smoke (or have recently given up). Be realistic: Even the best insurance doesn’t cover everything, and is no substitute for keeping on top of repairs and maintenance, and dealing promptly with leaks, mould, mice and the other unpleasantries that life can throw at you. Think about excesses: The excess is the amount of each claim you pay yourself. A compulsory excess is what the insurance company requires (often £100, with a higher charge for subsidence), while a voluntary excess is an additional amount you might choose to pay that will reduce your premiums. Don’t make the excess so high that you would struggle to pay it, however. Pay annually: If you can possibly afford to do so, you will save money by paying for the year rather than in monthly instalments.

Expert Comment

It’s not good news that according our research, 21% of 18- to 24-year-olds and 11% of 25- to 34-year-olds who have contents insurance will be looking to cancel their policy at renewal, citing the cost-of-living crisis. While it’s not a legal requirement to have a contents policy in place, the value that it offers makes it one of the best nancial investments you can make, particularly in a cost-of-living crisis. No one wants to think the worst, but if something should happen and you needed to replace your contents, it would cost a lot more than the average price of a contents policy. It could cost just over £1 a week to cover all your belongings, and provide peace of mind that if something should happen, you wouldn’t have to pay for everything again. The current economic situation means that the cost of everything is a major factor for many and that’s to be expected, but a home contents policy provides cover for possessions such as furniture, electrical items, jewellery and clothes, which would be a huge cost if they had to be replaced, and the concern is that many people across the country could be risking going without this cover to save money in the shorter-term.

Ceri McMillan, Home Insurance Spokesperson, Go.Compare

WHAT DO THE TERMS LEASEHOLD AND FREEHOLD MEAN?

Anyone searching property portals such as Rightmove and Zoopla will often find the words “ask the agent” as to whether the property is being sold freehold or leasehold, but don’t imagine that this is a minor detail –establishing a property’s status is crucial.

History Of Freeholds And Leaseholds

The system of leasehold dates back a long way and is a relic of English property law, dating as far back as the 11th century. In 1089, the Domesday Book included the word “freeholder” which means outright ownership of land, with the words “leasehold estates” appearing some decades later. While freeholders traditionally were powerful, wealthy families who owned large plots of land that they wanted to keep and make money from, leaseholds were allocated to poorer people – often serfs – to allow them to work on their land for a set period, while often providing services or payment in kind to the freeholder.

Changes To The Law

By the 1920s, wealthy landowners or freeholders were still in powerful positions compared to their tenants but, in the

UK, legislation including rent acts were introduced to prevent landlords evicting tenants and to protect tenants from unscrupulous rent hikes. By this time the leasehold system had become less profitable for landlords, so it was during this period that many landlords started selling off leases as a way to earn money while not losing ownership, the start of today’s system.

In the post-war period from the 1950s onwards, many apartments started to be built and establishing a particular land boundary clearly demarcated on a map was impossible as typically flats are within the same building. As no freehold could be established, flats were sold as leasehold. Originally, leasehold properties reverted back to their original freeholder/landowner when they ended, but in the 1960s this system was recognised as being unfair. Since then, various pieces of legislation have been brought in to protect leaseholders’ rights and allow them to extend their leases.

Length Of The Lease

The length of the lease is important as it affects how much you pay for the property, whether the property is mortgageable, and how much you will be able to sell it for – or even if you will be able to sell it at all. If the length of lease is over 100 years, there are no issues, and your purchase should be straightforward. Anything less and the decision to buy must be carefully thought through. Generally, advice is that any lease that still has between 95-99 years left to run is fairly straightforward although you may need to consider extending the lease at some point so that the property holds its value when it comes to selling.

Any lease with 95 years or less remaining must be considered carefully. The sale price of a property with a shorter lease should be less than a standard sale as depending on how long you stay there you may want to extend the lease, which could prove costly. At this stage it is sensible to find out how much the lease would cost to extend and factor this into how much you are prepared to pay for the property. Anything less than 80 years should be approached with caution as the costs to extend could be much higher and getting a mortgage might prove difficult or even impossible. Trying to sell a property with a short lease is equally challenging. Thanks to the 1993 Leasehold Reform Act, most leaseholders have a legal right to extend their lease once they have owned the property for at least two years. There is a process to follow which has strict timescales.

Terms Of A Lease

Finding out the terms of a lease is also important. Some leases are old and may have what can seem like strange conditions attached. The first step should be getting a copy of the lease from the seller of the property, or the estate agent, or at least getting information on the lease in writing. Along with the name of the landlord/ freeholder and the length of the lease, it should also specify any conditions attached.

For example, some leases forbid pets while others prevent owners from subletting at all or subletting for short periods such as Airbnb. Some conditions may affect renovations or improvements, for example a common clause in apartment blocks is the banning of installation of wooden flooring.

Ground Rent

Leaseholders must pay ground rent, a regular payment to the freeholder or managing agent as a token that they do not own the land the property is built upon. Ground rent is charged by the freeholder, although collection is often carried out by a management services company. Your lease should say when, and how much, these payments should be and also how often they could increase. There are parts of the country, particularly Bristol and Manchester, where freeholders are charged a nominal ground rent, often under £5 annually and known as a “peppercorn rent”, thanks to old laws.

Changing Legislation

Thanks to what is known as “the ground rents scandal”, the law was recently changed. The scandal arose as many owners of new build homes found that over time, ground rents were rising hugely so that they could not afford them and were unable to sell their homes. Last year the Government introduced legislation to stop this unfair practice; the Leasehold Reform (Ground Rent) Act 2022 made it illegal for freeholders to increase ground rent charges unfairly. The Act banned ground rents entirely on new homes with leases of over 21 years, plus other measures to protect homeowners. The Government said that the Act is intended to be the start of a process of major reform on leasehold property management in general. In January this year, housing minister Michael Gove told The Sunday Times that he wants to see the leasehold system of ownership, which he calls an “outdated feudal system”, scrapped by the end of this parliament.

Service Charges

Property owners, and often renters, typically pay a “service charge”, a payment for services and repairs related to the upkeep of any communal areas attached to their home if it is a flat within a block or a house within a development that offers services for residents, such as a concierge or gym etc. Service charges vary widely and can rise hugely. In London, in developments with a pool, concierge and gym, these can be very expensive. A typical London service charge is around £1,800 to £2,000 per year, in other UK cities around £1,500, according to the HomeOwners Alliance, which offers free guides for anyone considering buying a leasehold property.

Finding out what extra charges may be attached to any property you are buying beforehand is key, as even buying a new build home may bring surprises. Dedicated residential reviews platform HomeViews says that its insights “drive improvements across the UK property industry while helping consumers choose the very best new homes”. The website contains over 40,000 UK resident reviews of new build developments. A question the site regularly asks is “What do you wish you’d known before moving in?” Responses reveal that costly service charges are a familiar concern, explains HomeViews’ founder Rory Cramer, “Our review data shows that a significant proportion of new build owners wish they’d known more about terms and conditions before buying. This is most often connected to leaseholds and unexpected annual increases in service charges or management fees.”

Even in older-style properties, service charges can vary enormously, for example if repairs are needed to common areas, such as the roof. Even if the property you are buying is not on the top floor, or if you don’t use amenities such as a lift, these charges apply to everyone in the block. By getting a solicitor who is skilled in leasehold to examine a lease beforehand, you can see how much the service charge has been, any repairs that have been recently carried, and determine which repairs may be needed in future.

Buying an ex-local authority property can also be potentially expensive as leaseholders within a block may face large bills if major repairs works are subsequently carried out to the development. Post-Grenfell, many leaseholders of ex-council properties found themselves facing large bills and unsaleable properties thanks to unsafe cladding. With current concerns over mould, there are fears that leaseholders in ex-local authority housing stock could also face steep hikes in maintenance charges.

Conveyancing And Leasehold

Leasehold properties are more complex than freehold, requiring more due diligence from your conveyancer who must be skilled in leaseholds. Search Acumen finds that leasehold transactions can take up to 40% longer to manage than freeholds, which MD Andrew Lloyd explains, “This makes communication efficiencies between stakeholders absolute critical, whether that’s the buyer, estate agent or solicitor.”

More information: hoa.org.uk; leaseextensionuk.info; homeviews.com; london.gov.uk/ programmes-strategies/housing-and-land/homeslondoners/leasehold-guide; lease-advice.org; leaseholdknowledge.com

Expert Comment

We would advise anyone considering buying a leasehold flat to carefully check terms and conditions, especially concerning ground rent, service charges and admin/management fees. This is best done with the help of a conveyancing solicitor, but we would recommend the HomeOwners Alliance for more detailed information and advice.

Rory Cramer, Founder of HomeViews

Expert Comment

In an ideal world, our advice would be to avoid buying leasehold if you can. Properties with a share of freehold will give you more control over how the building is being managed. Unfortunately, most flats are leasehold and are the only option, so it’s important to realise that not all leaseholds are the same and there are many happy leasehold owners. Don’t be scared of buying, but it’s important to understand the terms of your lease, the schedule of service and maintenance charges. Don’t scrimp on a conveyancer – instruct one who will go through the lease with you in detail and highlight any issues.

Paula Higgins, CE, HomeOwners Alliance

Expert Comment

Gaining the lease maintenance paperwork alone can often add another four weeks on to a transaction time, and during today’s economic climate where mortgage offers are expiring based on ever-changing interest rates, four weeks can have the power to make or break a deal. As well as longer completion times, leasehold conveyancing costs can also be much higher, so by allowing further transparency throughout the process, buyers can see more clearly what their money is paying for and feel less frustrated along the journey.

Andrew Lloyd, MD of property data, insight and technology provider, Search Acumen

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