Landlords Insurance Dilemma

by Readers Question

8:32 AM, 9th August 2012
About 9 years ago

Landlords Insurance Dilemma

Make Text Bigger
Landlords Insurance Dilemma

I have received an email from one of our readers who has a Landlords Insurance Dilemma and I’m not confident enough to answer his question absolutely. If you can help please comment below, no blatant advertising though please. I will not approve comments such as “Call XXX on YYY I am an insurance broker and I can help”. However, I will approve useful comments which answer the question in detail.

Landlords Insurance Dilemma – Readers email …

“I am in the army so I have a pretty busy day job.  I purchased a property for just under a million pounds in London and hopefully one day I will live there – the yield is rubbish but I’m optimistic about capital growth.  As I said, I want to one day justify living in it – so it was bought with the heart not the head!

I have landlord insurance on this property, however I am concerned as I have a residental mortgage on it. My first concern is that that any claim I ever try to make on the landlords insurance might lead to the mortgage company knowing that I’m letting it and either calling in the mortgage or increasing the mortgage rate (perhaps even asking for retrospective payment from the rent money I already received). More importantly though, could the insurance company refuse to pay out if they find out that I don’t have permission from my mortgage lender to let the property?

I hear it’s quite common for people to have buy to let properties on residental mortgage which, if I’m right may also mean that their property is uninsured, even if they have purchased landlords insurance. 

I do intend to change my mortgage but I want to wait until its fixed initial two year period is over – however maybe I should try to do this before this point as I am pretty sure my landlord insurance will not cover any claim on a property that has a residential mortgage. At the end of the day, insurance companies do tend to have a reputation for looking for any reason not to pay out!

Any advice / help you can give would be wonderful and I’m happy for you to make a blog out of this issue of residental mortgage & landlord insurance if you want.

Regards

Chris”

I can’t see why an insurance company could dispute a claim on the basis that the landlord doesn’t have permission to let from his mortgage provider. as I said in the introduction to this article though, I wouldn’t want to stake my reputation on that.

What do you think?


Share this article

Twitter Facebook LinkedIn

Comments

Neil Patterson

8:46 AM, 9th August 2012
About 9 years ago

Hi Chris,

In the old days mortgage companies use to take what they called
a “Notice” over the insurance policy which stated the Insurer could not cancel
or change the Insurance without giving notice to the lender.

This practice does still happen but less frequently and as your
mortgage company has not raised the question it is unlikely that a Notice
exists.

If all the information you have given to your insurance company
is correct and up to date then they are not normally concerned with how you
finance it. However this is a highly regulated area and should not be taken as
advice without asking your insurer, but I think they would have little
interest.

With regards to the residential mortgage technically you are
breaking the contract (called the deed) with your lender. The penalties for
doing that will be different from lender to lender, but I have no actual
evidence of any penalties being given whilst the mortgage payments are being
meet.

The correct formal advice would be to inform your residential
lender and they will then tell you what your options are. They normally range
from giving you permission for 1 year at a time with no change to the terms, to
altering the rate you pay, through to the most extreme asking you to redeem
your mortgage. The latter option is in my experience the least common, but
still a possibility.

I very much hope that helps to explain the situation, but as all
companies have different policies I cannot give definitive advice before you
make contact with them.

8:55 AM, 9th August 2012
About 9 years ago

Whilst you are almost certainly in breach of your mortgage conditions, even guilty of mortgage fraud if it was your intention to let it out when you bought it, that doesn't make the property any riskier from an insurers point of view if you have a landlords insurance policy. The definitive answer is to check your insurance paperwork thoroughly, if it says in there that you must have permission from any mortgagee to let the property then yes, you may struggle in the event of a claim, however I've never seen this myself in landlord insurance policies and it's probably because of what I said earlier, it doesn't affect the risk.

Bottom line; check your insurance policy docs or ask the insurer on a hypothetical basis if you don't want to draw attention to yourself.

Christopher Browne

9:07 AM, 9th August 2012
About 9 years ago

The crux of the issue I see is this. If the property burns down so I want to claim from my landlord insurance, they will turn around and say the claim is invalid as the property has a residental mortgage. Yes I agree how you purchased the property should have no bearing with how you insure the property - however insurance companies are certainly not charities & I'm sure they would look to use anything they can in order to avoid a big payout.

Again, you can't put normal household insurance on a property you are renting out as that certainly goes against the conditions.

I rang the company I got my landlord insurance through, Simply Business, they could not give advice, especially on anything specifically, however they said they provide landlord insurance based on various assumptions which if they were to ask every applicant would take hours and hours so they are left as assumptions - and it appears you never find them out (until a claim goes wrong I suspect!). I'm sure one of their "assumptions" will be that the property has the "correct" mortgage on it.

Therefore I believe if you rent out a property while on a residental mortgage there is no way of gaining insurance that will be valid in case of claim - a very dangerous position - yet I feel a lot of landlord do this.

17:38 PM, 9th August 2012
About 9 years ago

I have had 4 claims on my flat block insurance policy.
At no stage was I asked the occupancy status of the flat and at no time was any contact made with the mortgage provider.
No insurer contacts a lender.
However if you are letting your property then you should have LL insurance.even if it has a residential mortgage on it.
Providing mortgage payments are on time and for enough the lender won't know a thing.
You could end up with a hole in the ground.
Then property is rebuilt on insurance.
You may then have to advise the lender as the property rebuilt might be a better value than that replaced.
This would be good for the lender.
They need to know for mortgage valuation circumstances.

17:48 PM, 9th August 2012
About 9 years ago

I do the same Chris. I have a BTL mortgage on a HMO property. The lender does not know it's a HMO and I don't want to change the mortgage due to the unfavourable terms.

However, I insure the house as a HMO property. Ultimately, I checked the T+Cs of the insurance policy, including their more general terms of business etc to ensure they could not hold this against me in the event of a claim.

18:58 PM, 9th August 2012
About 9 years ago

Just play by the rules and then you wont get bitten in the bottom, it is more risky with tennants they don't always take care and accidents will happen

19:01 PM, 9th August 2012
About 9 years ago

More important than the insurance is the fact the mortgage was obtain on the wrong product. This is mortgage fraud, because you have lied to the lender. You should contact your lender and get permission to rent out the property.

20:17 PM, 9th August 2012
About 9 years ago

I would telephone a different, reputable insurance company, and ask advice that you are thinking of buying a house and if you were to be travelling away for long periods would like to rent the property out to keep it safe and secure. Ask them the questions you need answering. Do the same with a bank explaining the "potential" change of use from residential to commercial from time to time and I'm sure you will have a far clearer idea of where you stand.
And on a personal view, honesty pays 😉
The last thing banks want at the moment are houses on their books, Thats why they are bending over backwards to help people pay their mortgages and keep their home.

23:50 PM, 9th August 2012
About 9 years ago

I do not think that there would be a problem in real life as it is unusual for a landlord insurance company to check on who provides the mortgage and on what terms.
However, one of the questions you should have been asked when you applied for insurance was if any other party had an interest in it. If you have answered that correctly then the insurers DO know that a mortgage is in place.
I would point out, of course, that if you are found out and prosecuted then on EVERY single insurance policy you take out in the future you will have to declare a non-motor conviction - house, car, bike, life etc. You would become a 'poor moral hazard'.

9:54 AM, 10th August 2012
About 9 years ago

Slightly surprised by the guff, members of the armed forces are required to live where the MOD sends them, to buy a future home on a standard mortgage is quite acceptable to most lenders provided they are informed of the need to let the house out due to stationing requirements. The requirement that we have most regularly experienced is for the purchaser to have lived in the property for at least 6 months before the need to move arrives. Our experience over thirty years of dealing with the armed forces is that the mortgage provider rarely loads the rate charged, yes there are one or two who are completely anal but you learn to avoid them.

As to the insurer they are covering the risk to the property not the ability to repay the mortgage, ergo, the risk is specified by the terms in the let policy insurance .

1 2

Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

Are you a Mortgage Prisoner?

The Landlords Union

Become a Member, it's FREE

Our mission is to facilitate the sharing of best practice amongst UK landlords, tenants and letting agents

Learn More