Investing in a buy-to-let property can seem like a sure-fire way to see a sizeable return. However, renting to tenants is never risk-free. Even the most reliable of tenants can run into financial difficulties, and if something goes seriously wrong, they may be unable to pay their rent.
This could have a severe knock-on effect for you as the landlord, potentially causing you to default on mortgage payments or struggle to cover bills. This is where landlord rent guarantee insurance can offer security to buy-to-let property owners.
Find out how rent guarantee insurance can protect your rental income in the following sections:
- What is landlord rent guarantee insurance and how does it work?
- What does rent guarantee insurance cover?
- Do I need rent guarantee insurance?
- How much does rental guarantee insurance cost?
- How to find a rental guarantee insurance provider
- Final thoughts & FAQs.
What is landlord rent guarantee insurance and how does it work?
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).
Are rent guarantee and rent protection insurance the same thing?
Often rent income protection and rent guarantee insurance are confused, so before we move on here are the key differences. Rent guarantee covers your rental income when your tenants are unable to pay, rental income protection covers the amount you would have received in rent during an unoccupied period following an insured event, such as a flood or fire.
Rent guarantee insurance exclusively covers non-payment of rent, because your tenant cannot or will not pay. A comprehensive landlord insurance policy may be able to include both features on a package policy, but it is important not to confuse the two when taking out a standalone rent guarantee product.
What does rent guarantee insurance cover?
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.
What is excluded by rent guarantee insurance?
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.
Do I need rent guarantee insurance?
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.
How much does rental guarantee insurance 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.
How to find a rental guarantee insurance provider
If you already have a landlord’s insurance policy, it may be worth contacting your provider first, to see if you can add rent guarantee insurance to your existing policy. If not, the next thing to do is compare some of the available products on the market. There are several ways of going about this.
Going directly to insurers
Many commercial insurance providers offer some sort of landlord’s insurance product, which may have the option to add on a rent guarantee insurance feature. Insurers typically advertise these products on their website, where you can quickly generate an online quote.
Advisers can help you decide on the level of cover you need and can discuss with you the option to combine the product with other features.
Should I go through an insurance broker?
An insurance broker can be a fantastic way to find insurance. They’re experts in the field and can use this expertise to help you find a deal which ticks all your boxes, for a reasonable price.
Brokers tend to have a bad reputation, as many people assume that by adding in an intermediary, you’re bumping up your prices. However, brokers tend to receive far lower offers for a more extensive product than customers can access directly. Even with the brokers’ fees, you may end up saving considerable money on your premiums if you go through a broker.
What about comparison sites?
Comparison websites can be the perfect place to start your research. Comparison sites can display multiple deals from various providers, allowing you to directly compare the prices, policy features and perks of each policy.
Most comparison sites allow you to refine your research according to certain criteria, such as policies within a specific price range or to only show products that include a particular feature.
What to look for in a policy
There are several things to keep in mind when comparing rent guarantee insurance policies. It’s worth weighing up the following things:
- how much excess you would have to pay to make a claim
- whether there are any exclusions from your policy
- how much you can claim
- whether there are any limitations to the type of tenant you can accept
- the price.
Final thoughts & 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.
Do I need to carry out tenant referencing?
Almost all rent guarantee insurance policies require the policyholder to carry out references before the tenants move in.
Some insurers will require you to reference your tenants through them. Others will accept a third-party referencing company, provided they approve of it. Most tenants have to be fully referenced, including students, DSS and self-employed tenants. For full-time employed tenants, a four-point check may suffice. This four-point check includes:
- The tenant’s ID, including a photograph
- A utility bill or a bank statement
- A credit check: must be clear of CCJs, bankruptcy
- Confirmation of employment. A written employers’ reference on company letterheaded paper confirming the tenant’s permanent and current employment status, and that their salary is at least 2.5 times the tenant’s rent. These documents should be no more than a month old at the start of the tenancy.
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.
What other types of insurance should I consider as a landlord?
Most insurance providers offer comprehensive landlord insurance packages which can include many insurance products suitable for landlords. Some of the features you may choose to add to this kind of package, or take out as a standalone product, are:
- 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.