Guard against tenants who don't pay the rent

Find out how landlords can guard against rental arrears and whether it's worth buying this protection.

The recession must be making some landlords feel rather nervous. Rising job losses means a growing number of tenants could struggle to pay the rent. And when rental income is relied on for covering the landlord's own buy-to-let mortgage, arrears are a huge risk.  

In the past 12 months, the National Landlords Association says 74% of calls to its helpline were from landlords who needed advice on how to deal with tenants who can't - or won't - cough up. Perhaps it's not suprising, then, that the latest data from the Council of Mortgage Lenders shows that by the end of last year, 2.32% of buy-to-let mortgages were more than three months in arrears. 

It looks like the recession isn't going to go away anytime soon. So, if you're a buy-to-let landlord, how can you protect yourself against rental arrears?

One easy way is to take out rent guarantee insurance. Never heard of it? This little-known policy is designed to limit the risk of financial loss if your rental income suddenly stops. But is it worth having, or just another expense you can live without?

How does rent guarantee insurance protect you?

Cover varies from one insurer to another, but here are some common features:

• Policies generally only pay out for a maximum fixed period of 6 or 12 months.
• You won't be able to get protection for a let property until the first month's rent and dilapidation deposit has been paid.
• You will normally need to let a property under an assured shorthold tenancy, a short assured tenancy or an assured tenancy.
• Some policies charge a premium based on the amount of rent covered, while others charge a fixed price per tenancy agreement.
• Rental payments will be covered during the insured period, usually with an upper limit on the amount which can be protected each month and overall during a claim.
• There may be an excess which means you may not be covered for the first month's rent.
• Rent will be covered until the policy expires, or the tenancy agreement ends, or you gain vacant possession of the property so it can be re-let.
• Some policies may partially cover rent for a limited period even after possession of the property is obtained.
• Legal expenses insurance might also be included which covers the legal costs incurred in proceedings against tenants if the situation becomes serious. Some insurers may deal with the tenant eviction process on your behalf.
• Insurers will insist each tenant named in the tenancy agreement is credit checked and relevant references must be obtained. You will need to provide proof.
• And finally, it's good to know the premium is a tax deductible expense.

How much does cover cost?

Of course, the premium varies depending on the insurer you choose and the amount of cover you need. The Association of Residential Letting Agents (ARLA) says the average annual cost for this protection is around 3% of the rent. So, that means if the monthly rent for a property was £1000, a comprehensive rent guarantee insurance policy would set you back around £360 a year.

The table below outlines an example of the costs and benefits available from a rent guarantee insurance policy from Endsleigh Insurance. Note this will only give you a rough idea of the premium you might pay:

Endsleigh recalculate the premium every year. The maximum payout is £50,000. *Standard cover is not available over 12 months. **This cover will only be paid out once the property is in a suitable condition to be re-let.

As you can see, the costs vary considerably depending on the amount of protection required and for how long. Insurers will tell this protection is inexpensive, but I beg to differ. It's true, a premium of £54 a year might seem quite reasonable for a basic policy, but an annual premium of £370 looks a little pricey in my opinion. Ask yourself whether you would really need cover for a whole year, or would most tenant disputes normally be resolved sooner?

Of course, if your tenants are in arrears, then you have the right to take legal action. In serious situations you may need to evict. Experts at ARLA say it's not unsual for this process to take around six months, but in complex cases it could take longer. And of course, you'll have legal fees to pay on top of covering the mortgage. Rent guarantee insurance would protect you from these costs.

Don't forget, as with all insurance plans, it's sensible to shop around and compare quotes before choosing an insurer. And bear in mind that, if you let your property out through a letting agent, rent guarantee insurance may be included in the package they offer you. Check what's on offer before you start shopping around - you don't want to pay for the same cover twice.

Beware of the exclusions!

At the risk of sounding repetitive, you must, must, must read the small print of your policy before you sign up. Remember, insurers tend to be pretty strict when it comes to following the correct procedure for recovering rental arrears from your tenant. You don't want your claim rejected simply because you haven't taken the right steps at the right time.

There may also be a specific period from the inception of the policy when a disagreement with your tenant is excluded. For example, you may not be able to claim for the first 90 days.

Do you need rent guarantee insurance?

You may be able to recover rental arrears through the normal legal channels eventually, so you might wonder whether you really need this policy. Then again you might think paying 3% or so a year for a policy seems a small price to pay to cover your rental income for six or 12 months and to provide legal protection if trouble starts.

In an ideal world you would have an emergency savings cushion anyway, which you can fall back on should rent dry up for any reason. Arguably this is a better way of protecting yourself, but it's not always easy to achieve.

Above all, it's crucial that you avoid falling into arrears with your mortgage simply because your tenant has let you down. And if a rent guarantee insurance policy enables you to do that, it's worth considering.

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