According to the National Landlords Association (NLA), one in two landlords experience problems with tenants in arrears. Rent guarantee insurance can put a landlord’s mind at ease when it comes to letting out a property. If your tenants are unable to pay rent, this type of policy typically can cover your rental income so that you’re not left short, leaving you still able to meet mortgage payments and other expenses.
If tenants do find themselves in financial difficulty leading to arrears, they may be unable to pay rent for several months, or more. It takes landlords an average of around ten months to evict a tenant, and for most landlords, ten months of lost rent could be catastrophic. Having this type of policy in place to protect your monthly rental income can prevent financial ruin.
Landlord rent guarantee insurance is usually an optional feature that policyholders can choose to add to a comprehensive landlord insurance policy (with a few providers, it may be included in a general landlord insurance policy).
Coverage
Typically, a rent guarantee insurance policy covers tenants’ missed rental payments for a period of between six and twelve months. On top of guaranteeing rental income, a rent guarantee policy can cover:
- legal expenses to cover any disputes with tenants relating to the recovery of rent arrears, eviction or repossession
- free access to legal advice from solicitors and trained legal professionals.
Some policies may include extra features for free as part of the rent guarantee insurance product, such as continued cover while you’re trying to find new tenants.
Common Exclusions
The specifics covered by a rent guarantee insurance policies vary from provider to provider. Typically, however, a rent guarantee insurance product won’t include the following:
- Deferral Periods – Most providers refuse to accept claims made within a set period after taking out your policy. During this time, you won’t be able to cover unpaid rent. Similarly, most policies don’t cover the first month of rental arrears.
- Rental Income Once the Defaulting Tenant Leaves – If the defaulting tenant moves out, or if you evict them, most providers will cease your payments, whether or not you have found a new tenant.
- If You Decide to Sell Your Property – Most policies will stop paying out once you put your property on the market if you choose not to look for a new tenant.
- Certain Types of Tenant – Some policies may not cover you for rent arrears if you rent to particular kinds of renters, such as unemployed persons, students or those on state benefits, as insurance companies typically consider them a higher risk. Your tenants must also provide a tenant reference, without which your policy may not cover you.
- Contract Disputes – Not all policies cover legal costs if you end up in court with your tenant over a rental agreement dispute.
Its worth noting that most policies can cover all types of tenants, including students and those on housing benefits. You must however check with your specific provider to see which type of tenants they offer insurance for, to make sure you’re covered. You should also bear in mind that if your tenants have missed payments in the past, you may not be able to find rent guarantee insurance for these same tenants. Insurers tend to consider previously defaulting tenants too high-risk.
Rent Guarantee Insurance – Do You Need It?
Rent guarantee insurance is by no means a legal requirement. It’s therefore down to you to decide whether you could absorb the impact financially if a tenant were to default on their payments. Many landlords rely on their rental income to cover mortgage payments, if this is the case and you’re left without a rental income for several months, it’s well worth considering this type of insurance.
It’s particularly worth considering if you own more than one property. The more rental agreements you have, the more risk you are taking on. Rent guarantee insurance can take some of the stress out of renting, leaving you to enjoy a relatively secure monthly income.
Are There Alternative Ways to Protect Rent?
Some landlords see rent guarantee insurance as wasted money. It can be an expensive add-on, and not all landlords want to fork out the monthly cost, even if it could save them substantial costs should the worst happen. For landlords who don’t want to take out rent guarantee insurance, there are other ways to mitigate their risk.
One is by taking a tenancy deposit, as many administrators of the Tenancy Deposit Schemes consider non-payment of rent to be a legitimate reason for deduction from the deposit. The general rule of thumb for landlords is to take at least two months’ rent in advance to cover themselves during the period they seek possession through the court. However, it takes on average ten months to evict a tenant, so property owners should consider whether they could afford this period of non-payment before they rule out rent guarantee insurance.
Another option is to use a guarantor. This ensures that even if the tenant is unable to pay, the guarantor can step up and make the payments. A guarantor should be a financially stable individual who is willing to support the tenant if they find themselves in financial difficulty. Preferably, this person should be a homeowner. Landlords can then make a legal claim against the guarantor for the tenants’ non-payment if neither pays. That said, even using a guarantor is not failproof, as you can never guarantee somebody’s financial status.
Calculating Cost
How much you pay will depend on a multitude of factors, including how large the property is, how high the monthly rent is and how risky the insurer considers your tenants to be. Most policies offer flexible pricing plans, allowing you to choose the premiums you pay depending on how much excess you are willing to pay. While lower premiums can be attractive, it is worth considering whether you could afford the excess in the event of a claim.
When should I take out rental insurance?
The sooner, the better. Most rental policies come with several conditions. A typical one is that you cannot make a claim on your rent guarantee insurance until your tenant is one month in arrears.
Many policies won’t let you claim within the first 90 days of the policy, either, so it is worth having it in place as soon as possible. It’s also tough to get insurance in the UK if your tenants have previously defaulted, so you ought to get a policy in place before this could happen.
Final Thoughts and FAQs
Even the most reliable tenants and careful landlords can run into financial difficulty. There’s a whole host of reasons why a tenant may struggle to pay their rent, and while in most instances this doesn’t last more than a few months, in some circumstances this may result in a landlord seeking possession. If this is the case, it can take the best part of a year to complete legal proceedings, during which time rent is lost.
This extent of loss of income can result in financial ruin for the landlord, particularly if mortgage payments are at stake. A rent guarantee insurance policy can often offer you peace of mind when it comes to your rental income, ensuring you can meet your mortgage payments and keep your investment fruitful.
- Can I Get Insurance if My Tenant Has Failed the Referencing? – Some providers will accept a guarantor in place of a reference if a tenant fails the relevant referencing process. However, the guarantor will have to go through a similar referencing process as well as achieve a higher affordability factor to be considered.
- How Many Properties Can I Cover on a Rent Guarantee Policy? – Most rent guarantee insurance policies are specific to the current tenants of a particular property and run for the duration of their contract. Therefore, you can only cover one property on this type of policy, so you will need to take out a separate policy for every property you rent out.
Other Types of Insurance – Relevant for Landlords
- Buildings Insurance – This product covers structural damage to the building as well as damage to in-built features, such as fitted kitchens. It can protect you against incidents of flooding, storm damage, fire and other major events.
- Contents Insurance – This product is relevant for any furniture you have provided in the rental property. If flooding damage ruins the sofas and beds that you’ve provided, your buildings insurance policy won’t cover it. This can protect valuable contents such as carpets and other furniture.
- Unoccupied Property Cover – Most insurance policies don’t cover property while it’s uninhabited, as insurers consider the property a higher risk when there’s nobody there. Unoccupied property cover can extend your policy to include the times when it stands vacant between tenants.
- Liability Insurance – If somebody takes you to court over an incident which occurred on your property, such as a trip or fall, which results in death or injury, liability insurance can cover your expenses and legal fees.
- Landlord Boiler Insurance – This product can cover you against the hefty costs required to repair or replace a boiler in a buy to let property.
- Landlord Home Emergency Insurance – When things break down in a rental property, it’s down to you to make sure they’re up and running again as quickly as possible. This kind of policy offers you 24/7 cover for emergency building services, including urgent repairs, plumbing, electrical or heating work. This can include boiler cover, though you may have to pay extra for this feature.
- Legal Expenses Insurance – Sometimes, this feature is included under some of the policies mentioned above, or it may come as an optional standalone feature. This add-on can cover you against any legal expenses you may face, such as tenant taking you to court over unpaid rent.
