Title Insurance: What Property Buyers Need To Know
Buying a new property is an exciting prospect, but buyers face several financial risks throughout the process. Even the most thorough surveys and assessments can fail to uncover some houses' secrets, and, if it falls to you to foot the bill, you could face significant financial problems. Learn how title insurance can help you manage this risk, and find out why some property buyers regret their failure to take out this critical type of policy.
How the Torrens system works in Australia
In 1858, Sir Robert Richard Torrens introduced a way to deal with the process of recording and registering land ownership. Torrens was frustrated with the existing method based on old English law. This method was complicated, time-consuming and costly, and disputes often led to lengthy legal action.
The Torrens system offers property buyers a conclusive way to register land ownership. When you buy a property, you or your lawyer enter the transaction on the Torrens Title register, after which you become the exclusive owner of the property. Under the process, you also receive a Torrens Title, which sets out the details of the property, including your ownership, any outstanding mortgages or leases and information about any rights of way that could affect the land. The Torrens Title effectively prevents anyone challenging your land ownership, except for a few rare exceptions such as fraud.
Property defects and the Torrens system
As part of the conveyancing process, your lawyer may uncover a defect in the title. Examples of defects include:
- Evidence of fraud or forgery
- Illegal building works
- Contravention of zoning laws
- Contravention of rights of way recorded on the land
- Illegal sewerage connection
In many cases, these title defects could materially affect the property's value. For example, if the last owner breached building regulations, you may need to carry out extensive remedial work that could cost thousands of dollars.
If you are still within the cool-off period, you can choose to withdraw from the sale. You may also decide to renegotiate the price. Outside the cool-off period, the only available option is often legal action. In this instance, title insurance becomes vital.
How title insurance protects buyers
Title insurance protects you against the risk that you find out about a defect after you buy a property. The insurance extends to unknown and known risks. Known risks may arise when the vendor (or another party) tells you about a potential defect before you settle the transaction. For example, the vendor may tell you that he or she extended the property without building approval. This information can also come to light during a survey.
Unknown risks can occur at any time. These are the issues that you cannot easily detect, even with a survey or inspection. One of the most common unknown risks comes from forgery, but undisclosed illegal building works also affect many home buyers. Indeed, according to the Australian Institute of Conveyancers, 43 percent of properties in South Australia include illegal building works.
With title insurance, you don't need to worry about these risks. Your insurance policy will pay for all the costs that arise from these title defects. This type of insurance can also save considerable time and effort. When you can claim your financial losses from the insurer, you don't need to consider legal action. This benefit is particularly important when you want (or need) to move into and live in a property quickly.
Title insurance is generally inexpensive, and insurers normally charge a flat percentage of the property's value. The policy normally covers the full period of ownership, and you can also buy this insurance at any time.
Other things to look for include:
- Zero excess (so you don't need to pay part of any claim)
- No claims limit (you may find separate defects)
- Protection for inflation rate increases
- Cover for legal fees
Where title insurance doesn't protect you
Title insurance protects you against title defects and ownership problems, but these policies don't cover other scenarios. For example, if there is a pest or contamination problem in the property, you cannot normally claim remedial costs from this type of policy. Make sure you carefully check the terms and conditions of the policy with your insurer for any other exceptions.
Title insurance can help buyers avoid unexpected costs that arise from problems with a new home. To find out more about the options available to you, talk to a conveyancer like Geoff Williams & Associates.