Introduction
If a landlord doesn’t have rent guarantee insurance, it can be as detrimental as defaulting on mortgage payments and losing an investment property on a buy-to-let.
However, despite these circumstances, rent guarantee insurance isn’t the right fit for everyone and it also isn’t mandatory. Read on to find out what you should do with rent guarantee insurance to find out if this is the best fit for you.
From the benefits of rent guarantee insurance to the types of insurance that are the best for landlords. All will be revealed in this article so you can protect your property from periods where there are no tenants paying rent in your property.
What is rent guarantee insurance?
Rent guarantee insurance is one of the many types of insurance you can take as a landlord like home insurance or building insurance. It covers you in the event that a tenant isn’t able to pay rent and defaults on their payments. It is common for tenants to face financial difficulties and depending on the tenancy agreement in place, it may take a few months to evict a tenant that isn’t paying.
As a result, rent guarantee insurance can mean a landlord is able to cover rental payments for up to 6 months in some cases.
The details of rent guarantee insurance
Rent guarantee insurance is priced differently and covers different things depending on what insurance provider you go with and the terms of your insurance deal.
Like other types of insurance, this will also be made up of excess and then the premium of the insurance. The excess is the amount a landlord pays towards a claim and the higher the excess, the lower the premium of the insurance cover will be.
In this way, there is always a balance between the amount of excess you want to pay and the amount the premium will be, the more the excess is, the more cash you would have to have available in case there were rent arrears and the more risk you take on upfront.
What does rent guarantee insurance cover?
As well as the direct cover of any missed rental payments, rent guarantee insurance may also help a landlord cover the legal costs associated with evicting a tenant from a property. This can include bailiff fees and court fees.
In order to get more advanced cover, some insurance providers make sure that landlords have conducted advanced tenant referencing checks or have a rent guarantor in place for each tenant.
This means there is someone else signed on the tenancy agreement of a property to cover the rent in case the original tenant cannot pay. This may also be necessary to gain approval for mortgages too.
For this reason, rent guarantee insurance is commonly taken out for more risky tenants such as students. So, when renting out to these types of tenants it is important to take out rent guarantee insurance when buying a house using a buy to let mortgage especially if there are risky tenants in your property.
What isn’t covered in rent guarantee insurance?
Rent guarantee insurance won’t cover any missed rental payment after the period in which you have to make a claim. This period of time will vary based on the terms of your insurance policy. In other words, you would have missed the deadline associated with reclaiming rent arrears.
In addition, any claims made before the tenant is in rent arrears by at least one time period in which the tenant pays rent usually won’t be accepted. For example, if a tenant pays rent every two months, You cannot record a tenant as being in rent arrears unless they have delayed their rental payment by at least two months after the rent was due.
Another situation in which you cannot make a claim for rent guarantee insurance is if you make a claim for rent arrears within a short period of time after you have taken out the insurance in the first place. This period of time will vary based on the insurance provider but is typically 90 days.
Also, if a tenant leaves the property or the property is sold, then the rent cannot be reclaimed under rent guarantee insurance either. However, it may be the case that the net cover can be transferred from one landlord to another but this will strictly depend on the terms of the insurance policy.
Finally, depending on the insurance provider some insurance companies will not cover rental payments if you make a claim for a tenant that has had rent arrears in the past.
What are the benefits of rent guarantee insurance?
First of all, especially when there is no guarantor in covering the rental payment of tenants, the failure of a tenant to pay rent can have a huge impact on the cash flow of a property business. This impact is emphasised where there is only one tenant in the property such as in a single let property.
In larger developments where there are multiple tenants, the loss of one tenant will not have the same impact on the finances of a property. For example, up to 7% of landlords in the UK were in rent arrears after the financial situation of a lot of people changed in the UK all at once due to the pandemic.
In addition to the more obvious financial benefits of having rent guarantee insurance if something were to go wrong, rent guarantee insurance, like home insurance, may allow you to gain approval for mortgages that you otherwise wouldn’t have access to.
This is due to the lender viewing the investment of a property as safer where there is rent guarantee insurance in place. If there is insurance in place, then it is more likely if there were rent arrears in a property, the landlord would be able to collect rent to make their mortgage payments.
This is because consistent and punctual payment of mortgage repayments are the main thing that a lender cares about.
How can a landlord obtain RGI?
The first step in obtaining renting guarantee insurance is to make sure you have all the relevant tenancy information of all the tenants in the property. So if you have a HMO with multiple tenants there will be a fair amount of information to gather.
This can include credit checks, employment confirmation salary and other information about the tenant’s general expenses. This process is known as tenant referencing.
After a landlord has done this legitimately, they will be eligible for insurance from companies that offer rent guarantee insurance. It would be a simple case of deciding which type of rent guarantee insurance is most suitable for you as a landlord after this point.
How much is rent guarantee insurance?
For a typical rent guarantee insurance policy on a three or four-bedroom house. On average, this usually works out to be between £150 and £170 per year.
As you can imagine, on properties with rents that are as high as £1200 in some cases, the rent guarantee insurance price is negligible in comparison. However, the average rent in the UK is currently £626 per month which means a figure of around £150 per year may not be worth it in all cases.
Especially where there are only a few thousand pounds of profit being made per year on single-let properties.
What affects the cost of rent guarantee insurance?
As you may be able to tell, rent guarantee insurance price varies largely from property to property. The factors you should look out for that may affect how much you pay for rent include:
- The property location
- The property size
- The type of tenants you are renting to and how risky they are
- The amount of rent is charged for
- The type of insurance cover (basic, standard or premium)
- The extent to which the policy covers legal expenses
- The amount of excess you are paying in the insurance cover
In general, the most influential factor of rent guarantee insurance is the property location. If there are rent arrears in a property with rents that are priced quite high, there will have to be a higher insurance cost because it will cost more to cover these rents if there was something goes wrong.
What is the excess in rent guarantee insurance?
Excess is a term that applies to most types of insurance. It resembles how much the landlord can cover if there was a need for an insurance claim. If a landlord is willing to cover more excess for the failed rent payments, then their cover premium cost will go down as a result.
Paying a higher excess suits landlords who have more cash upfront to spend on the property. This would give them the confidence to have a lower premium on their rent guarantee insurance even though the insurance would then cover a lower proportion of the rent because they can pay for any rent arrears as and when they appear.
What kind of tenant referencing do you need for RGI?
Tenant referencing is a process of not only ensuring that the tenant isn’t high risk and isn’t likely to not pay their rent and also ensures that the tenant is suitable for living in the home that is being let out.
As an example, if there is a property with lots of stairs and tight spaces but the tenant informs the letting agent or the landlord that they have small children, they may deem this unsafe for children and suggest they rent out another property.
Loftis tenant referencing procedure
Lofti has an embedded tenancy referencing procedure that is compliant with rent guarantee insurance. This means after you sign up for the app you will instantly gain approval from rent guarantee insurance providers as they will now know the tenants you are renting in your property aren’t high risk.
Does rent guarantee insurance cover a landlord from legal disputes?
Whether rent guarantee insurance covers a landlord from the costs associated with legal procedures is up to the tenancy insurance policy that the landlord is involved with. However, no rent guarantee insurance can prevent the actual court procedure from taking place.
So if you have rent guarantee insurance that has “legal cover”, you will still have to turn up to court as a landlord. It would just be the case that the court and potentially bailiff costs will be reimbursed to the landlord under the insurance policy.
Is rent guarantee insurance still valid if the tenant changes?
However, if a tenant moves out due to the property being unsafe or something to do with the property being compliant with the tenancy agreement like there being no landlord boiler cover. This would mean the rent guarantee insurance is no longer valid.
What other types of insurance are there for landlords?
There are a few different types of insurance types a landlord could have on their property with the main insurance being home insurance. It is also worth paying attention to content insurance and building insurance.
Building insurance
Building insurance refers to the cover of all the structural types of a property. For example, the cover would relate to sheds and garages or maybe the more technical aspects of a home like the piping or the cables in the premises.
Content insurance
Content insurance covers all the parts of a home that aren’t associated with the structure of the property such as the walls, windows or doors. This would mean the insurance covers things like furniture and depending on the policy of the insurance could even cover more valuable, personal goods such as jewellery.
In conclusion
Overall, rent guarantee insurance is something that all landlords should be aware of when they bring in new tenants to their property. It could never pay off because you may never have a void period in a tenancy. However, if things perform unpredictably and tenants stop paying rent for a long time this could have a tremendous financial benefit.
Therefore, landlords must consider their financial situation individually to decide on whether to pay for rent guarantee insurance in the first place.
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