This is a question that we get asked frequently by landlords. The majority of landlords see this type of cover as an extra un-necessary expense that simply eats into their profits. The landlord has obtained glowing references for their tenants from the previous landlord & current employer so there does not seem to be any risk. Well, this is where they are wrong. Every credit check and reference under the sun can be obtained but this can only ever show the charges past history. This is obviously all we can go by as none of us have a crystal ball to see into the future but you only need to talk to other landlords or indeed watch the 'Tenants From ****' programs on ITV to realize that things can change at the drop of a hat.
A tenant previously stated as a 'model tenant' can turn your purchase to let investment into a nightmare. A bad break-up with a partner or unexpected redundancy are a couple of common problems that cause a tenant of good repute to go 'off the rails'. Think, if your tenant defaults on their rental payments for 2-3 months would you be happy to absorb this? Could you afford to fund the mortgage payments yourself? What if the tenant will not communicate with you or leave the property, you stand to loose thousands of pounds in lost rental income and legal expenses incurred to fight the tenant and you should also take into account the time and stress involved.
There are generally two types of Rent Guarantee Insurance policies, Percentage Rated and Entry Level.
The majority of Rent Guarantee Insurance policies are charged at a certain percentage of your annual rental income. This is typically around 4% plus Insurance Premium Tax (IPT) of 5% on the premium. A landlord with a monthly rental income of £ 800 per month would pay £ 420 for this cover.
These policies are more basic and do not have all the 'bells and whistles' but are much cheaper. For around £ 100- £ 150 per annual you can purchase an entry level policy that includes legal expenses cover and will pay you your rent arrears up to a certain limit (typically £ 2,500 per month) with a maximum indemnity limit for rent arrears of around £ 10,000 per claim. These entry level policies are seen as a more viable way of providing landlords with that extra protection for their buy to let investment. The costs are more justifiable and usually the cover provided is sufficient for the landlords needs.
What are the differences?
Typically the main difference between the policy charged on a percentage of rental income and the entry level policy is when the rent arrears payments start and finish. The percentage policy may not have an excess period and may continue to pay rent arrears after the tenant has been evicted to assist while you search for a new tenant. These payments are normally made for up to 3 months after vacant possession is obtained and pay around 75-90% of the normal rental income. The Entry level policies usually have a 1 month excess and will cease to pay rent arrears as soon as vacant possession has been obtained. You should carefully examine the 'Summary of Cover' or 'Key Facts' document for each policy to see where your money is going.
Both types of policy will generally require you to obtain references and carry out a credit check on your proposed tenant (s). 9 times out of 10 the Rent Guarantee Insurance provider will be able to offer you a referencing service, typically via an approved third party. If you have not already arranged a tenant reference or credit check, it makes sense to use the insurance providers approved service to insure you to comply with the policy referencing requirements to avoid a claim being declined to due insufficient referencing.