What is Landlord Rent Guarantee Insurance?
Landlord rent guarantee insurance will see a provider cover the cost of rent not paid. It is also referred to as tenant default insurance. It does not come as standard on landlord insurance policies but is an optional extra taken out at an additional cost.
This type of landlord insurance cover can be a vital lifeline for a property owner who uses their rental income to cover another financial burden, such as a mortgage on the home. However, even without a mortgage to think about, a landlord rent guarantee can provide much-needed peace of mind, especially for those inexperienced buy-to-let landlords. They are often looking to invest in a financial nest-egg, rather than build a large business empire.
Many landlords also decide to forego the cost of using a property management company and can find themselves having to confront tenants themselves if there is a dispute. A rent guarantee may provide these landlords with a stress-free backup.
The average monthly rental cost in the UK is £981 a month, or £839, when excluding London, according to HomeLet figures from January 2021. So the cost of a defaulting tenant can be substantial. However, this does mean the additional premium is more expensive than other add-ons.
All policies differ, and a rent guarantee sometimes does not cover the first month of missed rent or if rent is not paid while the house is up for sale. Rent guarantee insurance usually covers a minimum of six months and up to 12 months of lost rent.
How does rent guarantee insurance work?
Rent guarantee insurance works by providers meeting the cost of rental payments for a set amount of time, which will have been agreed in advance as part of the terms of the policy. It is usually set at a maximum of six or 12 months.
Before a claim is met, an insurer will expect the landlord to have filed adequate paperwork to demand the tenant’s rent and possibly begin legal proceedings.
Insurers do expect a landlord to have done necessary credit and background checks on a tenant before signing a tenancy agreement. A provider may turn down a claim if they find a landlord has been negligent in these investigations. The standards expected to have been met will be made clear in the policy terms and conditions. Some insurers may also demand a reference from a previous landlord or a guarantor.
A rent guarantee claim may also have a time limit on it and could be denied if insurers are not informed within a set amount of days of the first default.
Some rent guarantee policies also have a waiting period before they can be claimed against. It may be that the first month’s rent cannot be claimed against, for instance.
If a tenant does not pay rent because the property has become uninhabitable, a landlord cannot claim on rent guarantee insurance. This would fall under another add-on called loss of rental income insurance.
Just because a landlord has rent guarantee insurance doesn’t mean a tenant can stop paying without consequence. The insurance company may also provide other assistance, such as help with eviction or even covering all, or a proportion, of the rent when the property is repossessed. For example, a landlord is trying to find new tenants. A tenant can also have their deposit revoked, which would mean a landlord does not need to claim on rent guarantee insurance.
The rent guarantee insurance usually also includes a limited amount of legal support, with solicitor fees met up to a set limit.
Insurers may refuse to agree to a rent guarantee policy at all if the tenant has a bad credit score or even a job that is not a reliable source of income.
If a tenant has defaulted, a landlord should call their provider and claim handlers will guide them through the process.
How much does rent guarantee insurance cost?
The cost of rent guarantee insurance depends on many factors, largely the rent charged on the property—the more expensive the tenancy, the more expensive the insurance.
The price of a rent guarantee premium also depends on the financial stability of a tenant, with insurers demanding credit checks and background investigations are done. Some even request checks are made to determine the tenant’s job and a reference from a previous landlord. These risk factors can each affect a premium as an insurance provider will use them to assess the odds of a tenant defaulting.
Research by NimbleFins found that a rent guarantee insurance add-on can cost as little as £41 a year for a home being let for £800 a month. Meanwhile, a sample of £1,000 pcm property could cost about £46 a year to cover. According to the analysis of six providers, a tenancy costing £4,000 a month could have an annual premium of about £151. This is about 0.3%-0.4% of rental income.