FOOL'S EYE VIEW
The True Cost Of Your Home

By Jane Mack (TMFJane)
June 22, 2004

If you're a fan of the TV programme, Grand Designs, which follows people who are building their own homes, you'll know that most of Kevin McCloud's subjects seem to find it very hard to stick to their budgets. The building costs always seem to escalate for various reasons.

Miraculously, though, the finished product usually still ends up being worth far more than the owner has spent. And that's because the true cost of building a home is not the same as its value on the open market.

According to Halifax General Insurance, it's something quite a lot of people fail to take into account when buying buildings insurance. Apparently, 35% of homeowners think they need to insure their home for the full market value of the property when this simply isn't the case. More alarmingly, 33% don't think it's their responsibility to take out buildings insurance at all!

But, while there appear to be a significant number of people who are overinsuring their homes (and, therefore, paying excessive premiums), there are also a number who are underinsured. And the reason is often because they've forgotten to tell their insurer about any major home improvements they've made.

I discovered this myself last year when I decided to switch insurers. Three years ago we got ourselves a brand new kitchen which, while not luxurious by some people's standards, is a rather nice one. If our home was razed to the ground in a fire, we probably wouldn't have had enough buildings insurance to cover the cost of replacing it.

I read a good analogy somewhere which explained the difference between buildings and contents insurance. If you were to turn your house upside down and give it a good shake, anything that remains in place would be covered by your buildings insurance with everything else coming under contents. Buildings insurance doesn't just cover the bricks and mortar; it also covers fitted kitchens and bathrooms - even the paint on the walls. Policies usually cover garages, greenhouses and garden sheds too so these are all things to take into account when evaluating the costs of rebuilding.

As the Association of British Insurers (ABI) points out, the market value of your home bears no direct relationship to the costs of rebuilding your home and nor does your Council Tax band valuation. But the sum insured under a buildings policy must be for the full rebuilding cost of the home. Insurers will reduce their payout proportionately if you haven't insured your home fully.

Although many insurers will index-link your policy from year to year if building costs go up, you have to be sure that they start with the correct figure in the first place and that you notify them of any improvements along the way that could increase those costs. Remember, it's your responsibility to make sure that the sum insured is correct and that you review your cover every few years with your insurer.

To make sure you're currently on track, the ABI has a handy calculator on its website which should enable you to get a ballpark figure to start with.

First of all, though, you need to measure the floor area of your home. So toddle off outside and measure the length and breadth of the house and multiply those figures. Double it to cover the floor area upstairs unless the floor area is wildly different in which case calculate it separately. If you've got a three-storey house, you only need to add 70% of that particular floor area. (An unconverted attic doesn't count as a third storey, by the way). If you can't measure outside, then do it inside but remember to include the thickness of the walls.

You can use either feet or metres - the calculator caters for both - and then enter the relevant information required to get a rough idea of the rebuilding costs for your home. (Mine works out at roughly 44% of the supposed market value of the house).

The rebuilding costs automatically include an allowance for full central heating costs, demolition and site clearance as well as architect and surveyor fees. Although they assume you've got double-glazing, the cost is based on an average quality finish so if you've got a luxury kitchen and bathroom and expensive wall coverings, you might need to add as much as 25% on top.

Bear in mind that these ballpark figures are only for the more usual type of property. If you own a house that is listed or you live in a flat where building cover is more likely to be the responsibility of the freeholder, these figures aren't appropriate.

However, if they are suitable for your type of property, then try using our Insurancewide HomeWizard to find companies interested in insuring you. Be aware that it isn't necessarily cheaper to buy buildings and contents insurance from the same provider - separate policies may give you better value particularly if your home is more vulnerable to, say, burglary (contents insurance) or damage by flooding (buildings insurance).

As always, don't forget to read the small print of your policy to check exactly what cover you'll get - for example, will they pay for alternative accommodation if your home is so badly damaged that you can't live in it during rebuilding? Just remember, don't rely on index linking alone to keep your sum insured up to date. If you haven't reviewed your cover for a few years or you've recently made some major home improvements, now might be a good time to do it.

Find out more about Insurance and try the ABI calculator