APRA's Climate Stress Test Reveals Growing Home Insurance Gap — What Property Borrowers Need to Know

Australia's home insurance market may be approaching a tipping point — and the consequences could ripple through the property lending market in ways that borrowers, brokers, and lenders are only beginning to understand.

On 24 March 2026, the Australian Prudential Regulation Authority (APRA) released its Insurance Climate Vulnerability Assessment (Insurance CVA), a major stress test examining how a changing climate could affect home insurance affordability and create a growing "protection gap" across Australia's financial system.

What APRA's Climate Stress Test Found

The Insurance CVA is APRA's first major quantitative assessment of how climate-related physical risks — particularly more frequent and severe weather events — could affect home insurers and the broader financial system.

Key findings from the assessment include:

• A widening home insurance protection gap, where more properties become either uninsurable or prohibitively expensive to insure
• Coastal and flood-prone regions face the highest risk of insurance withdrawal or unaffordable premiums
• The protection gap creates second-order risks for lenders, as uninsured or underinsured properties increase credit risk on mortgages secured against those assets
• APRA is concerned about systemic financial stability implications if the trend accelerates

Why This Matters for Property Borrowers

When you take out a home loan in Australia, your lender typically requires you to maintain adequate building insurance as a loan condition. If insurance becomes unavailable or unaffordable for your property, this creates a direct problem for your mortgage:

Lenders may reassess LVR requirements for properties in high-risk areas. If a property can't be adequately insured, a lender may require a larger deposit or decline the application altogether.

Property values in at-risk areas could soften as buyers factor in insurance costs and availability into their purchasing decisions.

Bridging loans and short-term financing for properties in affected areas may face tighter terms.

Which Properties Are Most at Risk?

APRA's stress test focuses on properties exposed to:

For property buyers or investors considering purchases in these regions, the APRA assessment adds another dimension to due diligence that goes beyond standard valuation checks.

What Non-Bank Lenders Are Doing

Non-bank lenders, including MPFG Capital, are increasingly attentive to insurance requirements when assessing loan applications. While non-bank lenders typically offer more flexibility than major banks on income documentation and credit history, property risk — including insurability — is always a key consideration.

For MPFG clients looking at investment properties or commercial assets, it's worth discussing:

• Current insurance costs for the target property
• Whether the property falls in a designated high-risk zone (APRA, ICA, and state planning portals can help)
• Lender requirements around minimum insurance coverage

The Bigger Picture: Climate Risk in the Lending Ecosystem

APRA's report is part of a broader global trend where climate risk is being systematically integrated into financial regulation. Australia's major banks have been stress-testing climate scenarios for several years; this assessment now puts the insurance sector firmly under the same lens.

For borrowers, the practical implication is that the traditional assumption — "if you can buy a property, you can insure it" — may no longer hold universally. Climate-driven insurance gaps are becoming a structural feature of Australia's housing market.

MPFG Capital advises all clients to factor insurance affordability and availability into their property purchase decisions, particularly in regions identified by APRA, state governments, or Insurance Council of Australia (ICA) data.

This article is general information only and does not constitute financial or insurance advice. Always consult licensed professionals for advice specific to your property and circumstances.