If you are a landlord, it can be devastating if your tenants stop paying the rent. However, given the current economic situation, growing numbers of tenants are struggling with the cost of living. Indeed, in 2022, 71% of landlords reported having at least one tenant in arrears.
Unsurprisingly, the demand for rent guarantors increased by 36% during the four years to 2022. Many landlords feel that having a third party willing to take responsibility for any unpaid rent gives them the confidence to let their properties to a wider range of people. However, many don’t realise that opting for a rent guarantor can sometimes cause expensive problems further down the line.
In this article, we look at the pros and cons of rent guarantors and contrast them with another option – rent guarantee insurance.
- What is rent guarantee insurance?
- What is a rent guarantor?
- Why do landlords ask for a guarantor?
- What’s the difference between a guarantor and rent guarantee insurance?
- Pros and cons of a rent guarantor
- Pros and cons of rent guarantee insurance
- Other ways to protect your rental income
- Why legal expenses insurance is so important
Many landlords use rent guarantee insurance to protect their rental income. It provides cover against the risk of tenants failing to pay their rent.
This type of insurance is popular with landlords with both small and large property portfolios. It is a particularly wise choice if you rely on rental income to cover mortgage payments, property maintenance costs, and other expenses associated with property ownership and management.
Rent guarantee insurance policies also include legal expenses insurance. This can save you a lot of money if you need to take action against a tenant for non-payment of rent or other breaches of their tenancy agreement, including evictions.
A rent guarantor is a person or company who agrees to take on financial responsibility for a tenant’s rent payments and (if specified in the rental contract) other obligations under a tenancy agreement.
A guarantor will co-sign a tenancy agreement. Then, if a tenant is unable to pay their rent, the guarantor becomes liable for doing so. If they agree, guarantors can also be held liable for other tenancy breaches, such as covering any damages or outstanding bills relating to a property.
There are two main types of rent guarantors. The first is commonly a relative or someone with a close relationship with a tenant. They must be over 18, reside in the UK, have a good credit history and – normally – a certain level of income or savings. This kind of guarantor is frequently nominated by student tenants or younger professionals who haven’t built enough credit history to pass tenant referencing checks or whose income does not meet affordability thresholds.
Not everyone knows someone qualified or willing to act as a rent guarantor. This is where private guarantor schemes come in. In essence, a specialist company becomes the tenant’s guarantor in return for a monthly fee. If the tenant then fails to pay the rent, the company becomes liable for doing so. Some schemes also require a third-party individual (such as a relative of the tenant) to co-sign the tenancy agreement as well. This means the individual and the company become jointly liable for repaying any rent defaults.
It is worth noting that landlords can take out rent guarantee insurance if their tenant also uses a rent guarantor, but Alan Boswell Group do not accept companies as guarantors or specific guarantor schemes when taking out rent guarantee insurance.
Landlords ask for a guarantor for many different reasons, but the principal one is to ensure that someone else is liable for the default if a tenant fails to pay the rent.
Other reasons for asking for a rent guarantor include:
- Broadening the pool of potential tenants. Some tenants, such as students or young adults, may not have a well-established credit history or a steady income. First-time tenants will lack references from previous landlords, meaning it’s harder to gauge whether they are likely to pay rent on time and keep the property in good condition. Similarly, international tenants may not have a UK credit history or rental references. Asking for a guarantor can allow landlords to consider a wider number of tenants.
- Growing rental and living costs. The cost of renting is going up. According to the Office of National Statistics, rental prices increased by an average of 5.3% in the year to July 2023. Add in high inflation and a cost of living crisis, and many tenants’ incomes are increasingly stretched. This could mean that more people who would have passed an affordability check in the past would not anymore. Asking for a rent guarantor mitigates a landlord’s risk of financial loss if a tenant finds they can no longer pay the rent.
- Shared tenancies. In shared tenancies, where multiple individuals rent the same property, the tenants are ‘jointly and severally’ liable for the rent. This means if one person fails to pay the rent, the others become liable for the shortfall. If this happens, it’s possible the other tenants won’t – or can’t – pay the extra. Asking for a guarantor for each tenant helps to ensure collective responsibility.
The key difference between a rent guarantor and rent guarantee insurance is one of risk (and where it falls).
If a tenant has a rent guarantor, the financial risk of the tenant not paying rent or breaching their rental contract falls on the guarantor. If things go wrong, there is no certainty the guarantor will meet their responsibilities to the landlord. This can result in long and costly legal proceedings.
By contrast, with rent guarantee insurance, the risk falls on the insurer. If a tenant defaults, the insurer will compensate the landlord according to the terms of the rental insurance policy. The company will only fail to pay in cases where a landlord has breached the terms of their cover or failed to meet their legal responsibilities to their tenant.
In short, if something goes wrong, you’re much more likely to be compensated if you have rent guarantee insurance. That said, other pros and cons are associated with using either a rent guarantor or opting for rent guarantee insurance.
If you are a landlord, some of the pros of using a rent guarantor include:
- Personal connection. Rent guarantors are often family members or close friends, which can provide a strong sense of trust and responsibility.
- No premiums. Unlike insurance, landlords don’t have to pay premiums for a rent guarantor.
- Multiple tenants. If you have a guarantor for each tenant sharing a property, it is less likely that the remaining tenants will have to cover the rent if one defaults.
On the other hand, landlords need to bear in mind these cons:
- Dependence on a guarantor’s financial stability. While a guarantor might have strong financial credentials at the beginning of a tenancy, their situation could change over time. This could affect their ability to fulfil their obligations if a tenant falls behind with the rent.
- Guarantor screening. For peace of mind, landlords will need to undertake referencing checks for each guarantor and tenant. This is a requirement if the landlord also intends to take out rent guarantee insurance.
- Legal expenses and difficulties. If a guarantor refuses to pay, it’s up to the landlord to pursue them. This can lead to lengthy and expensive court action (although you can mitigate this risk with standalone landlord legal expenses insurance).
Now, let’s look at some of the pros of rent guarantee insurance.
- Broad coverage. Rent guarantee insurance covers a broad range of tenant types.
- Lower risk. Good rent guarantee cover is lower risk. In the event of a default, the insurer will normally pay out – meaning the landlord doesn’t have to pursue one or more people for unpaid rent.
- Post-tenancy compensation. Some policies will pay a proportion of rent after eviction, giving landlords income while they find a new tenant. At Alan Boswell Group, our rent guarantee insurance pays out up to three months of rent at 75%.
- You can combine cover more cost-effectively. For example, rent guarantee insurance also includes legal expenses insurance. This means you can get assistance with evictions, serving notices, and a range of other legal issues (such as tax).
- A more professional relationship. The insurance company handles claims and compensation, keeping the transaction more business-oriented.
On the flip side, there are also these cons:
- Premiums. Landlords need to pay insurance premiums to keep cover in place. However, these payments are very small compared to the potential impact of unpaid rent.
- Tenant referencing. For cover to be valid, tenants (and a guarantor, if used) must pass referencing checks.
- You can combine rent guarantee insurance with a guarantor. If one or more of your tenants have a guarantor, you can still get rent guarantee insurance as long as the guarantor passes referencing checks. However, if rent is unpaid, your insurer will pursue the guarantor – landlords don’t have to.
Landlords can use other ways to protect their property and their rental income. These are some of the most common.
- Rent in advance. It’s common for a landlord to ask for one or two month’s rent in advance. However, there is no legal limit to the amount of rent in advance you can ask for. If there’s a problem with a tenant’s credit check or references, you could – for example – ask for six months of rent in advance (assuming the tenant can pay).
- Rent to Rent. This is when you let a property to someone for a fixed period, such as three or five years, for a guaranteed rent. You’ll generally let the property slightly lower than the market rate, but your tenant then finds their own tenants and collects rent from them. As a landlord, you’ll receive income even if the property is empty or the sub-tenants are not paying their rent.
- Taking a deposit. Asking tenants for a deposit helps protect you against the risk of damage or unpaid rent. However, there are strict rules about deposits, deposit schemes and how landlords can claim back money from a tenant’s deposit. It’s unwise to rely on a deposit to cover rent defaults – sometimes tenants stay in a property for months before you are able to evict them.
We’ve already seen that when tenants don’t pay rent or otherwise breach the terms of their contract, it can lead to lengthy legal processes to evict them. This can be expensive for landlords, saddling them with legal costs when they’re not receiving rent. For this reason alone, it’s wise to have landlord legal expenses insurance as a standalone cover or as a bolt-on to rent guarantee insurance.
However, the importance of this cover has recently grown. This is because, in August 2023, the government introduced the Housing Loss Prevention Advice Service (HLPAS). This gives anyone at risk of losing their home free legal advice and representation in court, regardless of their financial circumstances.
While this scheme will help discourage landlords from evicting tenants unfairly, it will likely mean that more landlords will fight court battles – even if a tenant loses, they won’t have to pay costs. Given that it can cost between £2,000 – £5,000 to evict a tenant through the courts, landlords with smaller portfolios could end up seriously out of pocket if a tenant wins a case. Considering that landlord legal expenses insurance with Alan Boswell Group costs £60 per year, or £40 if bought alongside rent guarantee insurance, it’s a small price to pay to protect yourself against this increased risk of legal action.
What checks should be done on a guarantor?
If you do decide to ask a tenant for a guarantor, it’s important that you undertake the same checks as you would on a tenant. These generally include the following:
- A credit check
- An affordability check – including income, savings, and financial obligations
- Employment verification
- Legal and residential status – to ensure they are resident in the UK and over 18 years of age
- Bank account validation
- County Court Judgement / bankruptcy / insolvency checks
Can a landlord refuse to accept a guarantor?
Yes, as a landlord, you are not obliged to accept a tenant if they need a guarantor or a guarantor that a tenant has chosen. Normally, you’d reject a guarantor if they didn’t pass the checks made on them, but you don’t need to give a reason.
Is a rent guarantor legally bound to pay?
Yes, a rent guarantor is legally bound by the terms of the agreement they sign. This agreement outlines their financial responsibilities and obligations if the tenant fails to meet theirs. However, if a guarantor refuses to pay, it may mean costly legal action for the landlord.
Rent guarantee insurance to protect your income
As you’ve seen, opting for a rent guarantor can bring benefits. In particular, it can open up a wider pool of tenants and give you peace of mind that any unpaid rent will be covered. On the other hand, things can easily go wrong. If a guarantor won’t – or is no longer able – to cover any rent shortfall, you may have to resort to expensive legal proceedings with no guarantee you’ll recoup the money.
On the other hand, rent guarantee insurance moves the risk to your insurer. As long as you comply with the conditions of the policy and your legal responsibilities, your insurer should pay out if your tenants stop paying rent. Combined with legal expenses insurance, it protects you from potentially spending thousands on court action.
Whether you choose to have a rent guarantor, rent guarantee insurance, or combine the two is up to you. At Alan Boswell Group, our advisers help thousands of landlords choose the right cover for their needs. If you’d like to learn more, contact us on 01603 216399.