Rent insurance- do I need it?
We reported over the weekend the worrying statistics that indicated a dramatic rise in claims being made against their rent guarantee insurance.
EndsleighLet reported a 68% surge in claims made against their specialist rent guarantee insurance.
Unemployment amongst tenants is a spectre that haunts many landlords; especially those landlords with younger tenants. Youth unemployment has been rising particularly sharply as employers choose younger inexperienced staff to lay off first.
How does rent guarantee insurance work?
The essence of rent guarantee insurance is that it relies on the prospective tenant being thoroughly credit checked first; often by the rental guarantee insurance company. This will ascertain the risk to the insurance company and allow them to evaluate whether they are prepared to take on the risk of insuring the tenant.
Once the prospective tenant has passed the tenant referencing the insurance company should be able to offer the landlord rent guarantee insurance.
Despite recent increases in the number of landlords claiming on their rent guarantee insurance. A little bit of undercover work revealed that cover for a full 12 months of rent guarantee insurance under the Endsleigh scheme still comes in at just £100 for a monthly tenancy of £500 pcm. This interestingly has not changed since last year.
I was recently sent a landlord insurance renewal from Alan Boswell. Their own rent guarantee insurance scheme provided through Aviva (aka Norwich Union), quotes only £40 to cover each rental property.
They also work on a sliding scale, making it cheaper for landlords who want to cover more of their rental properties.
What do I get under the Endsleigh tenant insurance scheme?
A landlord taking out rental guarantee insurance will get the following:
• Protection against rent arrears whilst Endsleigh handle the claim • Legal cover – defence and prosecution • Covers all types of tenants who have successfully completed the referencing • Cover 50% of lost rent for 3 months in between a successful eviction and finding new tenants
Alternative ways of protecting your rent
1. Taking a tenancy deposit
For years a landlord has used a tenancy deposit as a way of protecting themselves from the financial loss of the tenant not paying their rent.
If the tenant stops paying their rent and then moves out the tenancy deposit schemes will have to take into consideration any claims by the landlord against the tenancy deposit held by them. A claim for non payment of rent is included as a legitimate deduction by the administrators of the Tenancy Deposit Schemes.
It should also be one of the easiest to prove that the tenant has failed to pay. A landlord would just have to provide evidence of the tenancy and the rental account shortfall.
Landlords are generally advised to take at least two months of rent in advance and this should cover them for the period during which the landlord seeks possession through the courts; although the process can take considerably longer than the two months notice period for the legal procedures to take there course. The result is that a landlord could end up out of pocket even though they end up receiving the full amount of the tenancy deposit. Many tenants also show a resistance to paying more than 2 months worth of rent as a deposit.
2. Using a guarantor
The other method for a landlord to ensure that they receive rental payments; even if the tenant is unable or unwilling to pay is to obtain a guarantor.
A guarantor is a financially stable individual, preferably a homeowner who is prepared to stand behind the tenant in case of financial hardship. Ultimately, the landlord can then make a legal claim against the guarantor for the tenants’ non payment of rent.
We have recently set out in detail about the procedures and merits of using a guarantor.
Belt and braces
Which method should I use to protect my rent?
The reality is that a landlord should consider using all three mechanisms to protect their future rental income. No one method is full proof. The exact combination will largely depend on the type of risk profile for the prospective tenant and this judgement is best made by you. It might also be wise to assess the performance of your rental portfolio. Some properties by the nature of the tenants they attract will represent a greater risk to a landlord of not receiving their rent.
In these cases a more defensive rent protection plan is warranted.