The rental market has changed and, without the option of large rent payments in advance, agents and landlords must find new ways to mitigate risk. Fundamental to this is the old investors’ adage: Past performance is not an indication of future success. Job loss, illness or a relationship breakdown can impact even the perfect tenant.
For landlords, protecting rental income should be as important – arguably more so – than protecting the building itself. Financial protection is fundamental in so many other areas of our lives. Buildings and contents insurance is compulsory for most mortgages. Car insurance is a legal requirement. Products like health insurance, income protection, travel cover – they are all researched and purchased as a matter of course. This should be true too for the protection of rental income.
Rent guarantors and rent protection insurance products operate on the same, basic premise; both offer landlords a back-up option for rental payments if a tenant cannot pay. This however, is where the similarities generally end.
For agents and landlords navigating the Renters’ Rights Act, the difference is made even more complicated by an influx of providers and products that don’t necessarily deliver what they seem to suggest. Too often, we’ve seen insurance products describe themselves as guarantees, muddying the waters further, and guarantor services that – under the bonnet – seem to function more as insurance products. This is even more concerning when you consider that insurance is a regulated activity in the UK.
A professional rent guarantor promises to pay the rent if the tenant finds themselves unable to do so during their tenancy, in exchange for a fee paid by the tenant. The guarantor is in place from the outset, ahead of the tenancy agreement being signed.
Having a professional guarantor in place is a valuable tool for tenants who cannot otherwise meet income or referencing criteria, such as students, retirees, freelance workers or people on benefits. It can unlock tenancies, benefiting agents and landlords. The application process can be very quick, speeding up tenancy agreements and reducing void periods.
The level of support varies across providers. Not all services will include longer-term tenancy coverage, damage protection or legal support. Others, like RentGuarantor, will work with the tenant and the landlord to find a satisfactory solution on both sides and ensure the rent gets paid – and that wherever possible, that the tenant can stay in their rented property.
A rent protection insurance however, is taken out by the landlord to protect themselves if their tenant cannot pay their rent. The landlord can claim back a sum to cover their losses and the insurer will compensate them for lost rental income for a limited period. The policy might include cover for legal expenses, but not always. The tenant is not involved in the contract and the insurer has no claim against the tenant for reimbursement.
For landlords, the main benefit of insurance is income continuity. Some policies also include solicitor fees, court costs, possession proceedings and enforcement, all of which will reduce the financial impact of eviction proceedings. An insurance product offers landlords structured financial protection across a property portfolio. It can also be useful if repossession is taking time, providing income to the landlord while they wait to regain their property from the tenant. On the downside, policy cover periods are usually limited, and like any insurance, a protection policy comes with waiting periods, excess payments and caps on claims. Rent protection insurance won’t unlock new tenancies, and the cost sits with the landlord.
From a legal perspective, the insurance provider must identify the customer’s need and provide clear information before the contract is concluded. The landlord must understand what they are buying, who the policyholder is, what is included and what is not. Terminology is crucial. A landlord who is told that their rent is ‘guaranteed’ can reasonably assume that payment is almost certain, but limitations should be as prominent as the headline promise.
It is the tenant’s decision to use a professional guarantor service, which means the cost is their responsibility. With an insurance product, purchased by a landlord to protect themselves in the event of a tenant being unable to pay, the costs fall with the landlord. Only one of these products is required to ensure the rent gets paid, but there’s no reason that both cannot be in place at the same time. A rent protection insurance protects the landlord. A professional guarantor service offers support to both landlord and tenant, enabling agents to get more tenancies over the line, more quickly.
A typical insurance policy might cover six months’ worth of rent in the event of arrears. A professional rent guarantor service will usually do more but this can vary. RentGuarantor covers up to 12 months’ rent or until the landlord regains possession, whichever comes first. RentGuarantor will also act as a guarantor for a tenant for up to 3 years, or until the landlord regain possession. RentGuarantor will pay after 3 months’ arrears (and backdate it). This ensures it can follow any legal processes required, which won’t necessarily be possible from a provider paying out from the first month.
A provider like RentGuarantor offers mediation support as part of its package, helping to get things back on track before legal fees or eviction proceedings are required. RentGuarantor also handles court applications and associated costs if it comes to this. Or, landlords can purchase insurance products that provide legal cover, but should check their policy includes everything they need.
Landlords (and tenants) should take time and care to understand the product or service they are purchasing, making sure it is fit for purpose. Some landlords for example, might be offered the option to ‘opt out’ of an insurance policy they didn’t ask to purchase to begin with. Then, digging deeper, when in arrears and the cover is needed, they find the policy doesn’t do what they need from it. It’s crucial they don’t wait for arrears to make sure they have the correct protection in place.
Insurance in the UK is a regulated activity, and providers must be authorised by the Prudential Regulation Authority and Financial Conduct Authority (FCA). RentGuarantor meanwhile, is the only professional rent guarantor provider listed on the Alternative Investment Market (AIM), part of the London Stock Exchange, and as such, is subject to rigorous governance and compliance.
Insurance or guarantor, consumer choice and clarity of message is vital. Either way, financial security should be as much a part of the process as a standard tenancy agreement. Landlords should know that the rent is secure even before the tenancy becomes a problem.
Paul Foy, CEO, RentGuarantor.
