How Climate Change is Affecting Property Insurance, Mortgages, & Buyers

Climate change is very real, and among many other things, it can have very real effects on prospective home buyers. Weather-related events can severely impact things like property insurance, which then in turn can affect mortgages — and whether or not you’re able to buy the house at all.

As a result of climate change, extreme weather events are now increasingly common, and it is safe to conclude that the situation will not be getting better.

In British Columbia, wildfires burned through several regions of the province earlier this month, so much so that smoke from outside Metro Vancouver drifted and blanketed Vancouver, pushing the city to the top of the world rankings for poorest air quality. That has since moderated somewhat due to cooler temperatures, but as of publishing, BC’s Wildfire Dashboard shows that there are still 172 active wildfires in the province.

For British Columbians, this is not the first time wildfires have devastated the province. Just last summer, the small village of Lytton — with a population of about 250 — was almost completely destroyed due to wildfires sparked by temperatures that broke national and global records.

Unfortunately for communities affected by wildfires, the trauma often goes beyond property damage, but even those who aren’t directly affected can be impacted.

Climate Change & Property Insurance

Since last summer’s wildfires, even those who are looking to move into those regions have been affected, with stories of people being denied property insurance and the threat of wildfires cited as a reason.

Image: Malachi Brooks / Unsplash

“Some insurance companies may suspend writing new policies or decline to provide more coverage on existing policies in a known, active fire zone”, the Insurance Bureau of Canada (IBC) said in a 2021 wildfire FAQ. “Home insurance is designed to protect your property against unforeseen risks. When your home is in an active fire zone, the risk is no longer unforeseen, it is clear and present. Consequently, an insurer may decline to write new coverages.”

In an interview with STOREYS, IBC’s National Director of Consumer and Industry Relations, Rob de Pruis, emphasized that these denials of insurance are temporary, during periods of time when there is an imminent threat or elevated risk. He also says different insurers assess that risk differently. “Some companies use a blanket 25 km radius, some use a 50 km, some are more sophisticated and look at topography,” de Pruis said.

Once that risk subsides, the restrictions on selling new insurance policies are then lifted. (The restrictions do not affect renewals.) When asked whether or not the risk of extreme weather events can affect premiums, de Pruis said premiums are not as affected as some may assume at first glance.

In BC, insured losses as a result of last year’s wildfires in Lytton alone resulted in a loss of $102M. Canada as a whole suffered $2.1B in insured losses in 2021 due to severe weather events, according to the IBC statistics, and seven of the 10 years that have seen Canada’s highest insured losses have occurred in the past decade. But insurers are “well-capitalized for these kinds of events,” de Pruis says, adding that insurers expect a certain amount of losses due to severe weather events and therefore spread out their risk.

READ: Droughts, Floods, and Storms Could Cost Canada $139B by 2050

He also points out that just because an area was recently devastated by wildfires, it doesn’t necessarily mean it will be designated as having elevated risk. Pointing to the example of Fort McMurray in Alberta, which was devastated by wildfires in 2016 and resulted in the largest wildfire evacuation in Canadian history, de Pruis says the chances of another wildfire hitting the region are slim, because many of the things that can burn — and help wildfires grow — have already burned down.

Insurance, Mortgages, and Closing

But while there can be temporary restrictions on property insurance for prospective buyers, that delay can go a long way.

To get a mortgage on a home, buyers need to show proof of property insurance, and a delay in getting insurance can result in a delay in securing a mortgage, would could hinder your ability to make an offer on the home you want, which can mean you won’t be able to get it at all.

Aside from the property insurance delay, mortgages can also be affected by worsening climate change because mortgage lenders will often require a property appraisal before you’re approved, and may require additional appraisals in the event of extreme weather events.

“Lenders want to confirm that the property is still worth what they project it to be worth, and in a situation where you’ve purchased a home and something traumatic happens to the property, the appraisal may come in low or not insurable at all” , Leah Zlatkin, LowestRates.ca expert and licensed mortgage broker, told STOREYS. “Lenders may no longer want to provide a mortgage if the appraisal is reduced.”

CREA March 2022

Additionally, Zlatkin says that if the second appraisal comes in lower than the original purchase price, buyers will have to come up with the difference on their own.

Lenders calculate your maximum mortgage amount based on a loan-to-value ratio (LTV), so if the new appraisal comes in lower, your maximum mortgage amount is also lowered, which means you have to increase your down payment to get the same mortgage .

Assuming the seller doesn’t lower the price for you to match the appraisal, or if you aren’t able to come up with that additional amount, that would affect your ability to close the deal, Zlatkin says.

READ: “Bank of Mom and Dad” Increasingly Turning to Reverse Mortgages for Downpayment Gifts

What You Can Do

Both de Pruis and Zlatkin — as well as Steven Harris, an insurance broker at LowestRates.ca — told STOREYS that they would recommend prospective home-buyers do their due diligence.

For property insurance, IBC’s de Pruis recommended buyers shop around, since different insurers may assess the risk of extreme weather events differently. Zlatkin, the mortgage broker, and Harris, the insurance broker, both recommended buyers work with their realtors to add clauses to an offer that would protect you as a buyer, in the event of an extreme weather event.

Harris and de Pruis both recommended homeowners review their insurance policies and coverages regularly, as the Province of British Columbia also did this year ahead of the wildfire season.

All three people who spoke to STOREYS recognized that these difficulties could likely become increasingly common, as a result of the risk of extreme weather events likely to continue increasing. And it’s not just wildfires.

A Strategic Climate Risk Assessment for British Columbia published in 2019 by the Ministry of Environment and Climate Change Strategy identified a multitude of weather events that are of high risk to the province.

“The greatest risks to BC are severe wildfire season, seasonal water shortage, heat wave, ocean acidification, glacier loss, and long-term water shortage,” the report said. “Other risks that have the potential to result in significant consequences include severe river flooding and severe coastal storm surge.”

Other regions of Canada have their own set of dangers. Those dangers result in delays, which can affect how much you have to pay for your dream home, not to mention whether you can get it at all. Because, as they say, time is money.

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