Household - rebuilding costs: DIY SOS

With a continuing downward spiral in house prices over the past couple of years, there has been a growing trend for homeowners to stay put and improve their properties rather than relocate in such an unstable market. With an estimated £25bn being spent annually in the UK on home improvements and DIY, this trend is not looking likely to tail off any time soon. But are policyholders considering the impact this work will have on the rebuilding cost of their property?

A recent survey by Sainsbury's Bank estimates that, within the next 12 months, 1.34 million homes in the UK will undergo a loft/roof conversion; 1.9 million will have an additional construction or conservatory added to the property; and 713 000 will build a garage. But the question remains as to how many of these homeowners will accurately update their insurers with the details of such changes?

Counting the costs
Quoting for buildings insurance and ensuring customers have an adequate level of cover is purely reliant upon the accuracy of the information provided by the homeowner and this can prove a tricky undertaking. All homeowners, even those that have not carried out any home improvements, should review the rebuilding cost of their home every three years, even when it is index linked. They should then notify their insurer accordingly in order to stay abreast of inflationary cost changes, location factors and market trends specific to their property.

Ultimately, to ensure an appropriate level of cover is obtained, it all comes down to an accurate rebuilding cost being established for the property. Many policyholders still find it difficult to understand that market value has no direct relationship to rebuilding costs. As a result, the Building Cost Information Service estimates that 30% of homeowners fall into the trap of insuring their homes for market value rather than rebuilding cost.

The latest research by BCIS highlights that, for the UK as a whole, around six in every 10 homeowners (approximately 58%) leave themselves open to being over-insured if market value is used, with homeowners paying an average of £140 more in premium than necessary. Conversely, a fifth, (21%) of UK homeowners leave themselves open to being under-insured with an average shortfall in cover of £40 000 if a total loss claim is made.

With sum insured-based policies, if the rebuilding cost is insufficient, problems can occur in the event of a loss. Even with a policy with unlimited cover, failure to disclose improvements or additions to the property can invalidate the policy.

Those who opt for a bedroom-rated policy, will have their premium determined by the number of bedrooms in the property. It should, therefore, be noted that an upstairs extension, despite being referred to as a new sewing room, study or music room is still classified on an insurance policy as a bedroom. Consequently, it should be declared as such on this type of policy to ensure adequate cover is maintained.

Policyholders who vigilantly notify their insurer of any improvements to their home should subsequently not fall into the other common trap of increasing the sum insured by the amount of perceived value that improvements add to a home or the amount paid for the work. The correct insured value should be the costs to rebuild the entire property in the event of a total loss. It is a misconception that if £15 000 is spent on an extension, then it will cost exactly the same to rebuild it. The rebuilding costs of the extension as part of a total rebuild will always be lower, as economies of scale take effect.

Quick calculations
An extension costing 10% to 20% of the current rebuilding value — for example, a £20 000 to £40 000 extension on a property with a rebuilding cost of £200 000 — will cost 15% less than its initial cost to rebuild as part of a total rebuild, therefore £17 000 to £34 000.

At current rates every £1000 spent on home improvements will generally add between £1 and £2 to the insurance premium.

As most policies are on a new for old basis, it is only work that adds to what was originally in the home that will increase the rebuilding cost. Replacing a tired kitchen with a new one of similar scope and quality will not increase the rebuilding cost. This generally applies when replacing existing fixtures and fittings — for example, replacement windows, bathroom or kitchen.

Furthermore, carrying out home improvements will not always push up the premiums on a policy. Home security improvements may lead to discounts in premiums but such improvements would include the installation of industry-standard and approved locks, as well as burglar alarms.

Ultimately, insurers need to urge all policyholders, whether new or existing, to disclose any adjustments to their home, however minor, to ensure they have the right level of cover at the right price.

Renovations and estimated premium increase

Joe Martin is executive director at the Building Cost Information Service