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Live and let live

  • 21/05/2003
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With talk about the future of buy to let rarely out of the news, what are the insurance products that landlords really need to protect their investment?

At one time investing in property was the preserve of a few rich individuals; most people could only dream of buying a second property, which would generate a reliable monthly income and give them a stake in the property market beyond their own home.

The situation changed in 1988 when the government of the day deliberately set out to re-invigorate the private rental market in the UK through the introduction of a new housing act. The act was specifically designed to deregulate the UK’s rental market and provided a new legal framework that made renting out property a much more attractive investment proposition for private landlords.

Further changes to the law in 1997 removed another hurdle by making it easier for landlords to regain possession of their properties and reducing the risk of being stuck with a sitting tenant. These statutory innovations created an environment that enabled a small group of specialist mortgage lenders to begin offering cheaper and less restrictive loans to people looking to buy a rental property as an alternative investment to their pension or the stockmarket. The rest, as they say, is history. The buy-to-let market was born.

Today over two million households live in properties provided by the private rental market. Demand for rented accommodation has increased enormously due to a range of social and economic factors including the fact house price increases are causing people to take longer to purchase their first property. As a result, in the first half of 2002 alone over 58,000 buy-to-let loans were granted. Unsurprisingly, the growth of the buy-to-let market has been good business for mortgage brokers.

Easy money?

Today, most people know somebody who has or is thinking of investing in a rental property. Word quickly got around that it was an ‘easy’ way to make money. People were, and still are, attracted to the prospect of owning a tangible asset rather than seeing their hard-earned savings disappear on the currently declining stockmarket. It has proved an ideal investment for people looking for either a regular monthly income or more long-term capital growth.

However, like most ‘hot’ investment themes the real money is made by people who got in at the beginning. The rapid rise in property prices over the last few years and the growth in the number of rental properties available to let means that people entering the buy-to-let market now have less room for manoeuvre. Recent reports from surveyors show increased house prices combined with a softening rental market has led to a reduction in rental yields since 2001. This trend has led the Financial Services Authority (FSA) to express concern that new investors are more in danger of over extending themselves and could get into trouble if their rental income is insufficient to cover repayments.

The FSA’s concern is shared by the Council of Mortgage Lenders (CML). It has also gone on the record stating that most new landlords do not fully understand the way the buy-to-let market works and usually have fewer financial resources to fall back on if things do go wrong. This lack of knowledge is resulting in them purchasing properties which are harder to let and often remain empty for longer periods between tenancies. There is little doubt that these less experienced investors need the help mortgage advisers are ideally placed to provide, not only to find the right property and mortgage but also to advise them on other issues related to their investment such as insurance cover.

Consider the risks

Building and contents and landlord’s legal expenses insurance are the two principal policies buy-to-let clients should be advised on. Standard building and contents policies, for example, are not appropriate and should not be purchased by landlords as these normally ban commercial letting.

From an insurer’s point of view buy to let is a separate market with its own unique risks. This has led to the development of a range of specialist policies. The cost of cover will often be affected by the type of property that is being let and the status of the tenant.

For household cover, insurers usually require the landlord to notify them about the type of tenancy. The premium they will charge will depend upon whether the tenant is a professional person or a student, whether it will be a single or multiple let and in the case of an unemployed tenant whether the property is being let in their own name or whether the Department for Work and Pensions will be responsible for paying the rent direct to the landlord or their agent.

Some policies do not allow properties to be let to people claiming benefits who insurers perceive to be a higher risk. Therefore, if an employed tenant loses their job, it is important that the landlord immediately notifies their insurer of this change of circumstance. While most insurers should be happy to continue providing cover, although probably at a higher premium, failure to inform them could lead to insurers refusing to pay out if a claim is made.

Contents policies cover the landlord’s possessions if the property is part or fully furnished but will not cover the tenant’s. In the event of a claim being made, possessions are not usually replaced on a new for old basis ‘ as a private individual’s policy would ‘ any payout will be adjusted to take into account wear and tear. Accidental damage is also not normally covered by buy-to-let policies.

Landlords should be advised to take particular care to ensure they comply with their legal responsibilities in relation to fittings, contents or furnishings. They should be safe and meet all Consumer Protection Act 1987 and Furniture and Furnishings (Fire and Safety) regulations 1988 and all subsequent amendments.

Property Owners Liability cover is also usually included within most conventional insurances for let property. This cover protects the landlord in the event that a tenant injures themselves and pursues the landlord for damages as a result of the property not being in a good state of repair, for example, if they trip up over a worn carpet.

The other big risk facing a landlord is the problem tenant who either damages the property or disappears without paying the rent. While letting agents usually pride themselves on their ability to screen out bad tenants’ experience suggests that their intuition is not infallible. Experian, the credit information company, claims that landlords who fail to carry out credit checks on their perspective tenants are four times more likely to have tenants who default than those that do.

In the event that a problem occurs, landlords will be pleased that they had invested in a landlord’s legal expenses policy. These products cost around £25, usually providing up to £25,000 of cover and should be put in place to provide protection for when things go wrong. Their purpose is to enable a landlord to take action against tenants who breach conditions of their tenancy agreement.

It is estimated that the average cost of removing and cleaning up after a bad tenant is more than £1,500 ‘ not including any unpaid rent. For a landlord who is heavily reliant upon the rent to cover mortgage repayments, this could have very serious consequences.

Damage done

Buy-to-let household policies also usually provide some cover for loss of rent if a property is damaged as a result of an insurable incident, say by a fire or flood, and is not in a fit condition to be rented out. The type of policy recommended should be tailored to meet the financial strength of each landlord as the loss of rent cover provided will vary from product to product. Some provide cover for three months while others will pay out for up to six months. This is a classic situation where a client should look very carefully at the cover being provided not just the premium being charged. Saving money in the short term by choosing the cheapest policy may turn out to be an expensive mistake.

Insurance is all about buying peace of mind. The key to enjoying a successful and relatively stress free investment in a buy-to-let property is careful financial planning and having the right protection in place in case anything goes wrong.

Buy-to-let investors need good advice and access to good products. Buy-to-let insurance policies are not normally provided by mainstream insurers but by specialist companies such as IGI and Ocaso who are unlikely to grant agency status to brokers who will only generate small volumes of business. However, such policies can be sourced through general insurance networks and as the buy-to-let market will undoubtedly continue to grow there are excellent opportunities to sell allied insurance products alongside mortgages. It is a market which, to date, intermediaries have not fully exploited but will reward those who take time to do their homework properly.

key points

Clients should be advised to take out household cover and legal expenses cover above all else.

If the tenant loses their job the landlord must immediately notify their insurer to see if they are still covered.

Choose household policies carefully as saving money on premiums could prove expensive if they ever need to claim.


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