With reports of rising rent defaults, many landlords want to protect against the loss of rent.
Here we explain the benefits of rent guarantee insurance, as well as look at some of the small print.
How it works
In theory, rent guarantee insurance is a landlord’s proverbial best friend: if your tenant fails to pay their rent, the insurer will pay you instead.
The outstanding amount is then recovered by the insurance company from the tenants directly.
Of course, in some instances you may agree with your tenant to accept a delayed payment because of financial problems or other extenuating circumstances, and therefore would not need to make an insurance claim.
On the other hand, landlords may face difficulties of their own some months, and for around £120 a year rent guarantee insurance offers you piece of mind that your rent will be paid on time and in full when you most need it.
Relief for legal costs and void periods
Most good insurance policies will also include legal cover for the eviction of the tenant. Landlords should note that the eviction process can be a lengthy and costly period of time, the legal cover provides landlords relief in terms of time and money.
What’s more, as long as the eviction process started within the policy period, the insurance company will continue to pay your legal costs up to the policy limit even once the policy has ended.
In addition, most policies will pay 50% of the rent for up to 3 months after eviction whilst you find a new tenant. However, if policy ends during the eviction process you will of course have to renew the policy in order to receive this and your monthly rental payment.
The small print
Tenants need to be thoroughly referenced and credit checked in order to be granted the policy. Landlords should have had these checks done before the tenant moved in so there should be no additional costs.
Some insurers won’t allow claims for the first 3 months of the policy, and there may be an excess to pay that is equivalent to one months’ rent and landlords won’t receive anything without renewing if you are in the last month of an active policy.
It also means that there is little point in claiming for rent that is a month late unless you are sure the tenant will continue to not pay and/or you want to evict the tenant.
With only 30 days to claim after the rent became overdue, this can be a difficult judgement to make as your tenant may well intend to pay.
If you do agree to delay payment by more than 30 days, make sure you keep all your correspondence otherwise you won’t be able to backdate the claim if the tenant doesn’t end up paying.
Not only do you then lose another month’s rent on the excess, but it could void your policy altogether in some instances.
Policy renewals are not guaranteed. Unless eviction proceedings begin immediately, any tenant defaulting towards the end of a policy could stop you from being able to renew and so the eviction costs could have to be met by the landlord
The way that some other rent guarantee policies are set up means that the odds are stacked in favour of the insurance company.
Despite this, in a recessionary environment with decreased job stability even tenants with a good credit history may face financial difficulties, so it is very worthwhile for landlords to take action protecting against rent default.