Why does the bank require fire insurance on the collateral or the purchased house?
The tenor of a mortgage is very long. During the tenor, there is always the risk of fire to the collateral property or purchased house. A fire insurance policy will protect the borrower’s asset and give them peace of mind that the property remains safe. If a fire breaks out, the insurance firm will pay for the damage, leaving the borrowers to continue repaying loan to the bank. Second, the bank enforces a maximum LTV ratio. If the building is burnt down to the ground, the land value alone may not be enough to cover the loan outstanding. A fire insurance protects against such scenario.