Last updated: 19/10/2020 | Estimated Reading Time: 4 minutes
There are a great many reasons why people may be unable to pay their rent on time, and more often than not tenants are able to correct these issues and continue a healthy relationship with their landlord after a month or two. Despite this, having the possibility of not receiving rent on a property, particularly if it's under mortgage, can be a worry for landlords.
For this reason, rent guarantee insurance (often also called tenant default insurance or rent protection insurance) is a policy designed to ease your fears about a tenant disappearing in the middle of their contract. In this guide, we'll run you through all the details you need to know to confidently cover yourself against unpaid rent.
In This Guide:
- What is rent guarantee insurance for landlords?
- How does rental guarantee insurance protect your investment?
- How much does rent protection insurance cost?
- When should I take out rent guarantee insurance?
What is rent guarantee insurance for landlords?
Rent guarantee insurance is a landlord's safety net in the unforeseen circ*mstances relating to a tenant defaulting on their rent payments. For this reason, it's very common for landlords who are still paying their mortgage to take out rent guarantee insurance, in order to ensure that unexpected missed payments don't harm their own mortgage repayments.
Missed payments are even more of a pressing issue for landlords if the rent dispute escalates into court proceedings. Fees, along with the frustrations of a drawn-out legal process, can be a real headache for landlords, so being covered for these eventualities could be the difference between sleepless nights and peace of mind.
How does rental guarantee insurance protect your investment?
There are differing levels of cover available which will protect you from the various different outcomes of your tenant missing a rent payment. Almost all policies will cover you for the cost of the rent payment, which in principle will allow you to continue mortgage repayments even if the income from your tenant isn't coming through.
Additionally, many policies include legal cover as standard, which allows you to claim against the cost of court proceedings occurring after a rent dispute.
Some policies will require legal cover to be added as a bolt-on, and some won't include it at all, so it's important to read the fine print when you compare home insurance policies on your rental property.
Most policies are either 6 or 12 months, to match your tenancy agreement. However, it is best to note that this doesn't usually mean you will be paid out 6- or 12-months’ rent in total. In reality, there are often exclusions on the policies, allowing you to claim up to a maximum number of months (4 or 5 commonly). It's also common to have a 90-day stand down period between purchasing the policy and being able to make a claim.
How much does rent protection insurance cost?
The cost of your rent protection insurance will be dependent on a few key factors, including:
- The type of property.
- Value of the rental income per month.
- Whether the policy includes legal expenses.
- The standard of the policy, whether that be basic, standard or comprehensive.
When these are taken into account, the typical cost of a rent guarantee policy, is less than £100 per year. The average claim is around £650 so, it would appear as though the payment is negligible compared to the potential income saved.
However, you should take into account that an excess fee will need to be paid up front. The excess is usually either 1 month's rent or sometimes a set amount, for example £500. Check each policy to find out this value, as it can be the deciding factor in whether a claim is worth making or not!
It's a good idea to factor extra insurance policies like rent guarantee insurance and/or contents insurance into your preliminary searches for cheap home insurance deals. Some of the best home insurance policies come with additional legal proceedings cover, which may mean that with a more premium home insurance policy you could save on your rent guarantee insurance policy, too. Obviously, this will only be applicable in some circ*mstances so be sure to do your research and try alas many different combinations as possible when you run a home insurance comparison.
When should I take out rent guarantee insurance?
The short answer is ASAP! The earlier you are able to take out a policy, the better in most circ*mstances. This is because there are various stipulations to when you can claim which are designed to stop landlords buying policies simply to make a claim immediately.
In most cases you'll need to wait 90 days from beginning the policy to making a claim, which makes it most common to begin the policy at the start of the tenancy.
It's also common for claims to only be applicable after a month of rent arrears. This leaves enough time for you to go through the proper processes of contacting the tenant.
For these reasons, and because the insurer will usually reject candidates where the renter has defaulted on payments in the past, it's advisable to take out rent guarantee insurance at the start of your tenancy, having done as thorough checks as possible on your tenants.
