Rent guarantee insurance provides cover for landlords, should their tenants fail to pay their rent. It’s not a legal requirement to take out rent guarantee insurance – but it is something you should think seriously about if you rely on your rental income to pay the mortgage on a buy to let property.
Rent arrears is one of the biggest issues affecting landlords, with some surveys saying that up to two thirds will feel the impact at some time. Even if your tenants have been prompt payers in the past, anyone’s circumstances can change, leading to problems.
Before you decide to take out rent guarantee insurance, it is worth understanding how this product works, when it will pay out and what you need to do to make sure you are properly covered.
What is rent guarantee insurance?
Rent guarantee insurance is a type of landlord insurance which covers you for loss of income if your tenants don’t pay their rent. On average, it takes 5-6 months to evict a tenant, your insurance will cover your lost rent during the time it takes to regain possession.
Your tenants will need to be at least a month in arrears before you can make a claim. You will also need to start eviction proceedings by issuing either a Section 8 or Section 21 eviction notice, whichever is most appropriate in your case. Find out more on the government website.
What does rent guarantee insurance cover?
Rent guarantee insurance covers your rent if your tenant defaults. The policy will start paying out after a month of arrears and will cover you for a period of 6 to 12 months. Once your tenant has left the property, some policies will pay half of your lost rent while you find new tenants.
As well as covering you for loss of rental income, policies will usually also include:
- Legal expenses cover for disputes relating to the recovery of rent arrears, repossession and eviction processes, this is helpful if you need to take your tenant to court.
- Reimbursement for deliberate damage, a tenant refusing to leave the property and disputes over repairs and renovations.
- Some rent guarantee insurers will offer optional cover to protect rental income. This would cover the amount of rent you would have received during an unoccupied period, if you are unable to rent out your property for an insured reason, such as flood or fire damage.
There will normally be both monthly and maximum limits on the amount of cover you receive and there will probably be an excess to pay if you do need to make a claim.
What isn’t covered by rent guarantee insurance?
You should always make sure that you read the small print of your policy, so you understand what you are and aren’t covered for. Here are a few common exclusions:
Deferral period – Most policies will have a deferral period when you will be unable to make a claim. For instance, many policies won’t cover you for the first 90 days or for 90 days after you sign up a new tenant. You may also find that you won’t be covered for the first month of rental arrears.
When the tenant leaves – If you manage to evict the tenant who is defaulting on rent, or they leave willingly, you may find that your payments end regardless of whether you have found a new tenant. Some policies will continue to pay all or a portion of your lost rent. Make sure you check carefully so you understand what you are covered for.
When your property is advertised for sale – If you put your property up for sale you won’t be covered by your rent guarantee insurance.
Certain types of tenant – You may find that your insurance policy excludes certain types of tenants who are deemed at higher risk of defaulting on their rent. For instance, tenants who are unemployed, on state benefits or students.
Contract disputes – The legal costs of disputes with tenants over terms of your rental contract aren’t usually covered by rent guarantee insurance.
Commercial property – Rent guarantee insurance only covers assured shorthold tenancy agreements – find out more about these on the government website.
How much is the excess for rental protection policies?
The excess on your policy is generally up to you. The lower your excess, the higher your premiums will be.
Do I need a tenant reference for rent guarantee insurance?
You will need to have conducted proper tenant referencing checks and credit checks, otherwise the policy may not pay out.
You will also need to have collected a deposit from your tenant and placed it in a government-backed deposit protection scheme.
What other types of insurance can I get as a landlord?
Rent guarantee insurance is separate from other policies you will need to take out as a landlord. As well as rent guarantee insurance you should also consider the following types of cover:
Building Insurance – If you own the freehold of the property, buildings insurance is a good idea. It provides cover for damage caused to the building itself, for example, due to fire or flood. You will need a landlord specific policy, ordinary home insurance does not cover rental property. Although not a legal requirement, most mortgage lenders make this a requirement of taking out a buy-to-let mortgage.
Contents Insurance – Although tenants are responsible for insuring their personal belongings if you’re renting out a furnished property you might want contents insurance to cover the things you own.
Landlord Liability Insurance – covers you if a tenant or visitor is injured in the property.
How much does rent guarantee insurance cost?
As with all forms of insurance, your premiums will depend upon many factors, so it’s worth exploring costs on comparison websites. Don’t always go for the cheapest option – check that the cover is right for you and that the insurer you choose is properly registered in England with the Financial Conduct Authority.