HOW DOES A RENT GUARANTEE SCHEME DIFFER FROM RENT GUARANTEE INSURANCE?
The two terms have similar names, but entirely different meanings. Find out what they are.
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Rent Guarantee Scheme vs. Rent Guarantee Insurance
One of the biggest concerns for landlords is collecting rent from tenants. Most landlords have a buy-to-let mortgage or outgoings on their rental property and they need a reliable source of income from their tenant. If a tenant stops paying their rent, it can take time to chase debt or secure an eviction notice, which can cause considerable stress and financial hardship to the landlord.
There are two popular ways to underwrite any losses incurred should the tenant default on their rent. These are Rent Guarantee Insurance and Rent Guarantee Schemes. While both address the same problem, they are entirely different products. We compare the two options side-by-side to help landlords decide which will best suit their needs – Rent Guarantee Insurance or a Rent Guarantee Scheme.
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Rent Guarantee Scheme
Rent Guarantee Insurance
1. How it works
A Rent Guarantee Scheme involves entering a contract with a third party who will control and manage the property. This scheme is often between the owner of the property and a housing association, corporation or even a local council. The “tenant” will enter a contract and then pay a fixed monthly amount to the property owner, effectively guaranteeing the rent for the agreed term. They will then sub-let and manage the property.
Rent Guarantee Insurance is a straightforward policy that will pay the landlord if the tenant defaults. There are some conditions, but the insurance is affordable and effective.
Under a Rent Guarantee Scheme, the property owner has a guaranteed monthly income from a corporate tenant, such as a council or housing association. There may be legal set-up costs and the owner receives a lower amount than the market rental price (typically 6-12% of achievable rent). The amount of rent is guaranteed for the duration of the agreement.
Rent Guarantee Insurance can be as low as £55 for six months cover and £99 for 12 months cover, with a one-month excess. For policies with no excess, the premiums rise by about 30%. This would cover rents up to £3000 per month with a maximum £18,000 liability by the insurers. Rent Guarantee Insurance must be taken out before a new tenant moves in; it cannot be taken out on an existing tenant. Downside – you need to buy new insurance every time your tenant changes.
The idea of handing over a property to a professional company and letting them deal with the administrative hassle and management of tenants can be tempting. The Rent Guarantee Scheme means that day-to-day management of the property becomes the responsibility of the corporate “tenant”. The property owner/landlord has limited or no say on who their tenants are. In the case of council Rent Guarantee Schemes, their tenants may be high risk.
Rent Guarantee Insurance means the property owner still has full control of the property. They can select their own tenant and retain the right to refuse pets or make other conditions. In the event of non-payment, the owner must make a claim through the courts to evict tenants. However, the insurance pay-out will cover the loss of rent and any associated legal costs.
4. Tenants on Housing Benefit
Many companies operating a Rent Guarantee Scheme are designed to help house people who may not qualify for a tenancy, for example if they are long-term unemployed or receiving housing benefit. However, the property owner is guaranteed the rent by the management company, even if their sub-letting tenant gets into arrears or defaults.
One of the conditions of Rent Guarantee Insurance is that the tenants are employed and employer references are provided. This means that landlords who have tenants on Housing Benefit are unable to get rent insurance as their tenants are considered a higher risk.
With a Rent Guarantee Scheme, any necessary evictions are the sole responsibility of the company “tenant”. The home owner will not incur any legal costs in the procedure. The rent will continue to be paid by the company as per the agreement.
With insurance, should an eviction be necessary, the insurance policy covers legal costs as well as lost rental income. However, the property owner will have to arrange the eviction and may be required to attend court.
6. Set up Time
Rent Guarantee Schemes can take a long time to set up as both parties are entering a legally binding agreement. It is important to read the fine print to check who is liable for repairs and or/damage to the property as part of negotiating the terms.
Rent Guarantee Insurance can be arranged quickly by phone or online as long as the landlord can provide references and meet all the conditions.
7. Long-term Benefits
Council Rent Guarantee Schemes may offer incentives such as exemption from council fees in areas that are considered less desirable. Councils and Housing Associations may also offer a guarantee to return the property in the same condition and state of décor as it was handed over to them. This can be a considerable benefit for owners of properties in less desirable areas where heavy wear-and-tear or wilful damage may exceed the amount of the deposit.
By comparison, Rent Guarantee Insurance only covers financial loss of rent for the duration of the policy which is usually for 12 months and then renewable. Any repairs, decorating and replacement of furnishings and/or appliances has to be paid for by the owner in order to maintain the property in an acceptable state.
8. Regularity of Payment
Rent Guarantee Schemes offers regular monthly payments as part of the contract. The “tenant” is a professional business and is unlikely to default. Rent will arrive on time and hassle-free.
With Rent Guarantee Insurance, landlords may have to wait 60-90 days for compensation in the case of rent default. Also, insurance often does not come into effect for an initial period, typically 45 days after the insurance commences. This leads on to…
9. Rainy day fund
Engaging in a Rent Guarantee Scheme means the landlord does not have to have an emergency fund to cover any void/empty periods or loss of rent as it does not apply.
With a Rent Guarantee Insurance, the landlord is advised to keep an emergency cash fund to pay the mortgage and outgoings for at least 2 months, until the insurance money kicks in.
10. Void periods
With a Rent Guarantee Scheme there are no “down” months or empty periods between tenants. Even if the property is empty, the corporate tenant is obliged to pay the owner/landlord as part of the terms of the agreement.
Rent Guarantee Insurance does not cover any months when your property is unoccupied. It only kicks in if your tenant defaults on the rent.
A Rent Guarantee Scheme can be contracted for anything from three to 10 years. This means the landlord is locked in and may not be free to sell the property during the term. However, it does mean that the rent is guaranteed to arrive every month hassle-free.
Rent Guarantee Insurance can be taken out for six or 12 months and can be renewed as long as the tenant remains in the property. However, a new policy has to be taken out whenever there is a change of tenant – even if the old policy has not expired.
The property owner should do due diligence on the potential corporate tenant before signing any Rent Guarantee Scheme contract. However, the owner will no longer have to worry about the financial status of the person who will be living in the property and paying the rent. If the sub-letting tenant defaults on the rent, it is the management company who will have to bear the loss, not the property owner, under the Rent Guarantee Scheme.
With a Rent Guarantee Insurance, the home owner must still take references from any potential tenant. They must also meet all the conditions of the insurance in order to be covered in the event of a claim. Tenants usually have to have a job in order to meet the terms of the Rent Guarantee Insurance.
There are no financial limits with a Rent Guarantee Scheme. The two parties must agree a monthly rental payment which is suitable to both sides. For the property owner, there is little or no risk of the tenant defaulting as they are usually a local council, Housing Association or professional letting corporation.
Rent Guarantee Insurance policies often cap the rental covered at £2500 per month rental. Also, terms may include covering a maximum six months rental payments in any 12 month period. Rent Guarantee Insurance usually has a one-month excess which the landlord has to absorb before the insurance starts to pay out to cover unpaid rent. There are policies that cover 100% of lost rental income but the premiums are around 30% higher.
14. Legal fees
Rent Guarantee Schemes usually involve a legal fee to cover the paperwork.
Rent Guarantee Insurance does not have any hidden fees; you just pay the policy amount. If the services of solicitors or court costs are incurred, the insurance will cover this.
15. Suitable properties
Not all properties are suitable for a Rent Guarantee Scheme. The landlord needs to find a company that is willing to take their property at an acceptable price and this can take time. Depending on the location, this is not always possible.
In contrast, any rental property can be covered with a Rent Guarantee Insurance provided the terms and conditions are met.
While Rent Guarantee Schemes are complex, they are a long-term hassle-free way for landlords to ensure they receive rent every month. Private landlords who manage their own properties or use a lettings agent may find Rent Guarantee Insurance is an affordable way to protect against long-term rent default. Both schemes offer peace of mind, minimise stress and reduce the financial risk of roller-coaster rental income. It pays to know the facts before deciding.
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