Insuring against the risks of non-payment of rent

by Mark Alexander

19:02 PM, 25th March 2012
About 7 years ago

Insuring against the risks of non-payment of rent

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Insuring against the risks of non-payment of rent

Tenant Referencing comes in many guises but in this article I am going to focus on how landlords can outsource a major piece of due diligence and pass the risks of tenants failing to pay rent onto an insurance company by purchasing Rent Guarantee Insurance “RGI”.

The concept itself is very simple. The insurer performs checks on the tenant which allows them to establish that rent is affordable and is likely to be paid. The insurance company then insure against the risks to the landlord in the event of non-payment on the part of the tenant. This is what happens if the tenant stops paying rent if you have purchased an RGI policy and followed the correct procedures:-

  1. The landlord notifies the insurance company of none payment after an agreed period, typically 3 weeks
  2. The insurance company then commences eviction proceeding at their expense. The landlord does not get involved. Once this process is commenced the tenant will be evicted unless the landlord decides to cancel the insurance cover. It is very unlikely that any landlord would choose to cancel cover as it is always paid up front and in full and there are no refunds. If a landlord were to cancel cover they would be entirely exposed to the risk of future none payment.
  3. The insurance company will pay any lost rent to the landlord until the tenant has been legally evicted.
  4. The insurance company will then pursue the tenant for losses and costs through the courts.

Until very recently this type of insurance cover was only available to purchase via letting agents offering full management packages. It is now available for landlords to purchase directly.

There are two types of cover.

Full Tenant Referencing and Rent Guarantee Insurance Packages

The insurance company will appoint an agent to complete ‘due diligence’ on its behalf. This will include:-

  • Credit referencing covering all addresses for tenants for the last five years
  • Credit scoring
  • Employers or accountants reference to verify income
  • Mortgage company or previous landlords reference

This form of referencing takes up to seven days and whilst the effort up front is relatively cumbersome the insurance companies have found that their risks are substantially reduced.

Express Tenant Referencing and Rent Guarantee Insurance Packages

This cover is slightly more expensive but the advantage is that it can be arranged in an instant. The only ‘due diligence’ undertaken on behalf of the insurance company is a credit reference and a credit score. The overall cost is higher as the increased risk to the insurance company warrants a higher premium than the savings made as a result of not fully referencing.

Advantages of Landlords Using an RGI Strategy

Many landlords who are totally reliant upon their rental income to fund their mortgages and/or their lifestyles find these types of policies invaluable. Availability of cover, without having to employ the services of a letting agent, is improving all the time and the cost of cover due to increased competition has now fallen to affordable levels. An entire package can cost less than £100 per property with some providers.

Drawbacks of Landlords Using an RGI Strategy

If an insurance company feels that is is going to be at risk it will decline cover. This can severely restrict the market of potential tenants and increase the risks of rental void periods. Typical reasons for a decline in cover are:-

  • One or more tenants can’t be found on the voters roll for five years consecutively. This places restrictions on ages of tenants who can be accepted and if a proposed tenant has been living abroad or failed to register on the voters roll cover is unlikely to be accepted without a guarantor
  • One or more tenants have a less than perfect credit rating
  • Tenants do not have permanent contracts of employment
  • Income is considered insufficient to service the rent and other financial commitments

Guarantors

Some providers will overlook the status of the tenants if a home owning guarantor is prepared to guarantee rent payments. In this scenario the guarantor will have to be referenced too, as if they were the tenant. An additional contract would need to be entered into by the guarantor.

Contracts

Tenancy agreements and guarantor contracts are typically provided by the provider of the referencing and RGI cover. Customising them could invalidate cover.

Costs of Tenant Referencing

Most, but not all providers of RGI cover, charge for referencing each tenant and/or guarantor. Usually the costs of referencing is a relatively small portion of the cost of cover. Do check how much referencing costs as some companies charge for the full package whether cover is declined or not.

WARNING

The above is not the be all and end all of the ‘due diligence’ you should undertake before agreeing to let your property. If a tenant causes damage to your property an RGI policy will not cover the costs of any repairs. Below is a list of some of the other things I strongly recommend you do as part of your ‘due diligence’

  • Visit the prospective tenants in their current home to establish how they live
  • Insure the property for landlords liability and include cover for malicious damage caused by tenants
  • Consider lifestyle referencing your tenants – Google search TenantID and Landlord Referencing Services – both offer free services
  • Check that the insurance provider standing behind the guarantee is reputable. Currently, so far as I am aware, the largest insurer in this market is DAS. There are, however, many providers using DAS to underwrite their risks so it is definitely worth shopping around.

Statutory obligations

  • Obtain a landlords Gas Safety Certificate from a registered GasSafe engineer
  • If you take a deposit make sure bit is protected – use the Google search bar on our Home Page to search for “Tenancy Deposit Protection advice
  • Do not market the property without an Energy Performance Certificate “EPC”- visit our Property Services Directory to find a Domestic Energy Assessor in your area.

I always recommend people to ask lots of questions, read all of our newsletters and to join a landlords association. Whether you own and rent out just one property or a huge portfolio you are bound by the same laws.

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Comments

Mary Latham

19:22 PM, 25th March 2012
About 7 years ago

Thank you Mark that is all very clear.  I will keep it in mind if I ever feel the need for that type of cover but its clear to see why many landlords would find it very comforting - like all insurance.

Mark Alexander

19:53 PM, 25th March 2012
About 7 years ago

You are welcome Mary.

The knack to securing cover and widening the market of prospective tenants is to set expectations for the requirement for a home owner guarantor with a stable financial background very early on. If possible, at the point of initial enquiry. With a good guarantor there's nothing to prevent a landlord from considering letting to youngsters, people who have lived overseas, people on low incomes or with poor credit histories or indeed LHA claimants. Some employers will even stand as guarantors if they need to recruit a person for a specific skill set, I know I would consider it if I needed to recruit a highly specialised person from overseas for example.

0:26 AM, 28th March 2012
About 7 years ago

Thanks Mark, very helpful informaiton, particularly leaving the burden of DD on the insurers in the main. Is there a potential drawback here though? I recently had a management company come to me and tell me that their rent guarantee insurance would not only pay out if the tenant stopped paying or if they disappear but also if the house is vacant (i.e. after eviction they would continue to pay out) for up to 26 weeks. Now from reading your article it would seem as the insurers in your case would pay up to the point that the tenant is evicted. But then you may have a house on the market for 6-8 weeks: am I right that in your case above the insurers would not pay for that?

Mark Alexander

7:39 AM, 28th March 2012
About 7 years ago

Hi Paul

My description above was an overview of my understanding of RGI policies in the market. We do not offer such a product ourselves.

What you appear to be describing is a combination of RGI and rental void insurance. I've only come across this once before via Northwoods lettings and only combined with full management and discounted rents to offset the risks. If you have any further information I would be very pleased to review the policy.

8:47 AM, 28th March 2012
About 7 years ago

Hi Mark, thanks for your offer, yes I appreciate it was an overview, I was just making sure I was reading it right that RGI generally does not cover voids. I will ask for the the policy wording of this management company but I suspect it is not all they are making it out to be, what you have said has reinforced my thoughts on this.

Forgive me I am totally new to this site (thus this post her may be inappropriate) and find it amazing and really helpful, I've used your mortgage calculator as I have not purchased a new Buy-to-let in some time I've just been so busy and I'm shocked by the fees and saddened to see we are still only at 65% LTV for the most part. How are mortgage companies with regards to buying cash and then refinancing it straight away after a new kitchen, bathroom etc. has been put in? I stopped doing it because instead of being able to get the cash out in a month they insisted on my cash being in for 6 months before they would refinance it and lend against it. Has this eased off or not?

Mark Alexander

6:56 AM, 29th March 2012
About 7 years ago

The "six month rule" isn't actually a rule, it is however in the CML guidelines that solicitors need to report to lenders whether a property is being mortgaged within 6 months of ownership. Ever since the Credit Crunch, most lenders refuse to lend within this time frame on the basis that it avoids manipulation of valuations leading them exposed to greater risk. Some, but very few lenders choose to "take a view". A good example is The Mortgage Works who have a "Light Refurbishment" product. They will offer X% of the valuers opinion of value post works and advance X% of purchase price on day one and the balance when works have been completed to their valuers satisfaction. Please note that we are not mortgage brokers and that we recommend that you take professional advice prior to entering into any mortgages.


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