Date Published 06 March 2013
Increasing rents, a difficult economy and job losses mean a growing number of tenants are struggling to pay their rent. When rental income is relied upon to cover a buy-to-let mortgage, arrears can be a very real risk and it doesn't look like the economy is going to improve significantly any time soon.
Many with landlord insurance may be disappointed to find that unpaid rent isn't covered in their standard insurance policy. Whilst most landlords have some form of insurance in place, this is most commonly simple buildings cover, which would offer little support if a tenant were to stop meeting rental commitments.
One way to protect yourself is to take out specific rent guarantee insurance, a policy designed to limit risk should a tenant be unable or unwilling to pay the rent. But is it worth taking out, or is it an expense you could live without?
How do rent guarantee insurance policies work?
Obviously they vary from one insurer to the other, but common features are:
You will normally need to let a property under an assured shorthold tenancy
Insurers will insist each tenant named on the tenancy agreement and is property credit checked and the relevant references are obtained.
Policies generally only pay out for a maximum fixed period (6 or 12 months).
Some policies charge a premium based on the amount of rent covered, while others charge a fixed price per tenancy agreement.
There is likely be an excess which means you may not be covered for the first month's rent arrears.
Rent will be covered until the policy expires, or when the tenancy agreement ends, or you gain vacant possession of the property so it can be re-let.
Some policies (mainly comprehensive policies) may cover rent for a limited period even after possession of the property is obtained.
Legal expenses insurance might be included which covers the legal costs incurred in proceedings against tenants.
Some insurers may deal with the tenant eviction process on your behalf.
Do you need rent guarantee insurance?
If you've decided that cost is not prohibitive and like the idea of being insured to reduce the risk of rent arrears, is there anything else to consider? You might be able to recover arrears through any normal arrears process you use, contacting and visiting tenants or through the courts if the situation deteriorates. You may have a savings cushion to fall back on and arguably this is a better way of protecting yourself, but this isn't always easy to achieve. So you may think paying a few % of the rent is a small price to pay to cover the rent and provide legal protection. Afterall, you don't want to fall into arrears on your mortgage just because your tenant has let you down. There are two important points each should consider here 1. what's the likely risk i.e. what's the impact of the tenant defaulting and the chance of this occurring? 2. what level of risk am I comfortable with? If you're comfortable with risk a rent guarantee may not be for you, but if the risk and impact are high and you're uncomfortable with your level of risk, it's worth considering a policy.
Last, but not least, beware of exclusions and read the small print. Insurers can be strict when it comes to following procedure, particularly with regard to how tenants have been referenced.
Speak to Bergason about their rent warranty, which also provides £25,000 of legal cover and has no access, this policy can be added to most tenancies, whether fully managed or just tenant find only.