Time for Landlords to Consider Rent Guarantee Insurance?
In a recent survey 40% of landlords questioned stated that they have seen a marked rise in tenants who are experiencing problems paying their rent, compared to the previous six months. The survey by the Association of Residential Letting Agents (ARLA), highlights the increasing financial difficulty many tenants are finding themselves in as job cuts and price rises limit their ability to pay rent on time. ARLA noted that the problem has been caused by the economic downturn, as many more families struggle to hold on to their jobs or are taking home less pay from a reduced hours working package.
As previously reported, landlords have enjoyed marked increases in rental returns during 2010, as a result of the stagnation of the property market, as first-time buyers continue to struggle to raise mortgage deposits. This caused an imbalance between tenant demand and the number of available properties, forcing rents upwards. However now that austerity cuts are beginning to actually happen and more and more private sector employers are making redundancies, some tenants are struggling to pay their rent. The survey showed that 47% of letting agents had identified that tenants had tried to negotiate their rent with their landlords, indicating difficulty in ability to pay. This is up 2% from the previous third-quarter of 2010. The survey was conducted in the fourth quarter of 2010 and involved questioning over 550 UK letting agents.
Another factor which will impact landlord’s ability to service their buy to let mortgages in the future, is the cut in the Local Housing Allowance. A new system of benchmarking acceptable rents is being introduced in April 2011. Many landlords have previously relied upon housing benefit tenants, as they have provided a predictable source of rent in the past. The cut in benefits is likely to concern landlords, who generally provide high quality standard of private sector accommodation in inner cities. However from April 2011, they will have to do so with little less certainty from there tenant base.
Ian Potter, operations manager at Arla, said: “At the beginning of last year we predicted that the number of tenants having difficulties paying rent would increase and unfortunately, this seems to be the case today.’It is a situation which can have serious repercussions throughout the PRS as, without guaranteed rent income, landlords may also have problems paying mortgages. At worst, it may result in a rise in repossessions. While it is difficult for landlords to predict whether current or prospective tenants will hit financial difficulties, our research highlights the importance for landlords or agents to implement a thorough selection process and to conduct reference checks on potential tenants – and to consider the benefits of rental protection insurance. The same is true for anyone looking to rent a property – do your research before signing up with a new landlord. And if letting or renting a property through an agent, make sure the agent is a member of an organisation such as Arla, which ensures landlord and tenant money is protected by a client money protection scheme. Many agents do not have this consumer protection. Arla agents are also required to be members of an ombudsman scheme which can offer redress if things to go wrong.”
The increase in uncertainty has given many landlords pause for thought as to whether now is the right time to take out additional buy to let insurance options, in case their tenants unexpectedly fails to pay their rent. Rent guarantee insurance is designed to protect the landlord in the event their tenant fails to pay the rent. It provides some peace of mind for landlords concerned about the job security of their tenants.
Despite the fact that many tenants are credit checked before being allowed to enter a property, unfortunately many tenants may lose their jobs during the tenancy, as austerity cuts begin to bite. Most rent guarantee insurance policies stipulate a certain level of cover per month with a typical maximum period of six months. This usually gives the landlord time to instigate eviction proceedings against the tenant in line with UK laws. In addition there is usually a one-month excess on most UK policies. Some insurance companies are also offering options for legal expenses cover to help in the recovery of rent arrears or the cost of legal proceedings to ultimately recover missing or damaged items of furniture from within a dwelling.