Categories: Rent Guarantee

Rent Guarantee Insurance – Is it worthwhile or is there an alternative?

I am the Managing Director of iInsure365 and have been asked to do this article. I have a substantial amount of knowledge when it comes to dealing with tenants. Also I totally understand Rent Guarantee Schemes. Having run my own letting agency since 1993.  I only have a role now that oversees the business but I have an understanding of what the market is like.

COVID-19 has completely changed that Insurance Companies deal with Rent Guarantee.

It may be almost impossible to actually find a Company that is currently actually offering this product.  You will find that most have withdrawn this temporarily whilst they try and establish what the market is going to do.  This does not help landlords at all especially in the current crisis. Some schemes are now back but you need to check as they can very restrictive.

What does Rent Guarantee insure? How does it work?

When you take out a Rent guarantee as a landlord some people do not understand what the terms and conditions of the scheme are.  The first month’s rent would be paid by the tenant when they first move in. The rent guarantee scheme would not cover this. They will also want to ensure that they take the deposit. You may have to not claim for any dilapidations if they wish to take it for rent. They are therefore only guaranteeing four months of the contract if it is a six-month term.

Will they require referencing? All rent guarantee schemes require some form of referencing.  It is normally a personal reference, an existing landlord reference and a work reference.  I have always found this to be a pointless exercise.

The law changed some time ago so that nobody can give you a bad reference. Whilst it might tell you that they may be in arears or that they are employed by somebody it is never going to pay the rent in the future.  It is only giving you an indication of their financial status. You would have had that information from your own agent. You can ask the questions yourself. I find this a complete waste of time and just do not understand why companies bother.

You may find with a previous landlord that they give a reference you don’t like. However, it may be that they have fallen out with the previous tenant. There was nothing wrong with them. They may have just come to a disagreement on something. It is an opinion rather than an actual reference.

Is there a criteria?

All of the providers even if they were able to give you a current scheme will have a criteria. This could be anywhere between 2.5 times the annual salary in respect of the rent.  If the rent is £10,000 per year, they must earn a minimum of £25,000. Then they can get into the scheme.  However, most schemes are now requesting a guarantor. This causes no end of problems for you. Peoples pay is not always consistent. They may have furlough which could be completely different from what they are getting.

Is there going to be other criteria?

Yes, the Insurance Companies will always want a credit check.  They will carry out a check on one of the standard companies. This is to see whether the tenant has any defaults. They may have been bankrupt previously. However, it does not always ring true with the tenant’s position. The companies that deal with it all change massively. It will also restrict your lettings market.  A tenant may have a good credit history. They have never not paid anything in the past. They have no outstanding debts and do not use credit cards. But this does not always give them the credit score. Credit scores can be often misleading. The companies that they use like to see people borrowing money on credit cards and paying it off.  If you have never had a credit card but always paid your bills on time it could affect this. It does not necessarily mean you are not going to have a good credit card rating.

Will the scheme pay for my legal expenses?

It depends on which rent guarantee you take out. They often like to use their own legal companies to deal with all evictions. They may cover you for your own legal expenses up to a certain point. However, your letting agent should be able to give you all the legal advice you need. They should be able to keep you regularly updated with the law.  Did you know that the letting business has had 127 new laws over the last five years so you need to keep up to date?

Deposit – what will happen with this?

I touched on it earlier that the deposit will be taken at the beginning. However, under the Rent guarantee schemes they will want to use the deposit. This means it could leave you without a deposit for any form of internal damage.

What is the point of therefore taking a deposit?

The deposit should really be used for damages only. If you look at the schemes where deposits must be put into, they all confirm that this is what a deposit is for.  Not for covering rent.  If there is outstanding rent at the end of the tenancy, then it can be paid from the deposit. The rent insurance company would require this. It does not allow you to make any claims for damages. You will be completely out of pocket and only receiving the rent.

Will there be exclusions?

There are a huge number of exclusions when it comes to any of the rent guarantee schemes. There are many that are on the market. One of the biggest is the legal paperwork.  I have taken many other lettings agents files over the years. I have not on any occasion found anybody get the legal paperwork correct. Unfortunately, letting agents do not always understand what the up-to-date law is.

It is a total minefield and people do not understand what you must do by way of serving documents on the tenants.  For instance, there was a recent legal case which states you must serve a gas safety on a tenant within 30 days. Not only that is has be acknowledged by them. This was confirmed by the court of appeal. It means that just emailing it to the tenant is not enough. It must be done within 30 days and then they need to respond to your email.  This may prohibit you to serve a notice to quit. You would need to speak to your solicitor in this regard.

Different Schemes

There are various schemes out there. You will find that they all have different terms and conditions. There is no guarantee that the rent guarantee schemes will even pay out for your tenant if certain criteria have not been met. There are other exclusions for instance the tenant must be a minimum of 18 years old.  The tenant must not go into the property before the written tenancy agreement.  Comply with the Housing Act regarding the deposit.  Comply with the mortgage conditions on the property.  It is a complete minefield on what are required by the insurance companies and what their exclusions are.

A lot of these schemes are not put into place until 90 days has expired. The tenant has gone into three months of arrears.  There are also new Covid rules. They then take over the chasing of the rent and trying to resolve the problem.  For instance, the tenant may be getting universal credit. There is always a housing element to this amount. What will happen is that you can ask for this housing element to be paid to you direct. If the tenant is more than eight weeks in arrears.

What happens if I come to renew the contract but the rent guarantee scheme has been withdrawn?

This is a huge problem and has happened to one of my landlords recently.  He takes out his own landlord insurance cover even though we do not believe that it is required by.  They withdrew the product from the market. It has only been offered on a much lesser rent guarantee scheme.

This meant that the tenant would have to have certain completed documents by the renewal. The tenant refused to do so and therefore you are unable to get the rent guarantee scheme. What happens then. Do you then serve the tenant with notice to quit? Are you then in a position where you do not have a rent guarantee scheme and you are waiting for the notice to expire? New rules state that notices must be served 6 months in advance until the end of March, but this may be extended. In this case we were able to cover him with our guarantor scheme.

What if I have a noise complaint or an issue with damage internally that the tenant has made when they leave?

Your rental guarantee will not cover any damages internally.  You may find if the tenant has gone into arrears that they have taken the deposit to cover the arrears. You would be left out of pocket.

Is there an alternative?

Absolutely there is an alternative.  Some twenty years ago I looked at the market in my own area and decided that rent guarantee wasn’t the way to go.  If you had damages in a property, then the deposit did not always cover it. Often the rent guarantee scheme company would want to take this to cover the rent arrears.

We get guarantors who are home owners for every property.

I ensure that every single person that takes our property has a guarantor who is a home owner.  This ensures that you have somebody that will guarantee the rent throughout the term of the contract. You also have somebody that you can call if there is a problem such as noise etc.  There is no waiting for 90 days for the arrears. You can speak to the guarantor immediately. You can then speak to the tenant as well. It ensures that the tenant knows that if they do not pay their rent. Not only will you be communicating with you. But they will also be communicating with the guarantor.

I have had very few problems over the years with being able to chase tenants for their rents.  This is down to a huge number of systems in place. At the same time, we have guarantors that we can speak to who normally solve the problem.  They are often the mums and dads of the tenant. Some of them even pay the rent themselves so they do not have issues.

Does this restrict your letting market?

Yes, I don’t disagree it does restrict the market however it is not as bad as trying to get a tenant through a rent guarantee scheme.  This restricts the situation even more.

Does it cover if there are any damages?

It does cover you for every damage that the tenant may carry out during the term. This may be more than the deposit was. We had a recent case like this. The tenants caused a substantial number of damages. It was more than £6,000 more than the deposit.  We obtained the money from the guarantor. It shows that the system works.

What happens if you have a noise complaint?

Not only can you talk to the tenants but you can now speak to the guarantors as well and they can speak to the tenants as well.  It gives you an extra layer of comfort.

What happens on renewal?

Our guarantee is laid out in such a way that we do not have to request a guarantor to renew the guarantee.  They are guaranteeing the tenant until such time as they leave the property and against any damages as well.

Do you have problems with guarantors with students?

We have had absolutely no problems with guarantors when it comes to students.  We find that most students now understand that they have to have some sort of guarantor.  If you try to reference a student it would be a waste of time.  What are you exactly referencing? They are 18 or 19 year olds who have no form of income and their credit rating is almost zero you are just wasting your money.

Conclusion

I have run my scheme as I have said for almost in excess of 20 years and have never had any problems.  We let properties on a regular basis and it is just about informing tenants before they even view the property what the requirements are.  This helps them to understand why you require it.  Somebody might have the best job in the amount but look at the amount of redundancies there currently are.  There is no guarantee they will have that job in six months’ time.  Rent guarantee schemes are very limited on what they are able to provide to landlords and taking a guarantor gives you much more ability to deal with additional problems.

I hope you found this article useful.

iInsure365

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