There are currently more than 1.8 million private landlords operating in the UK. Being a landlord can be financially rewarding, but it also entails many challenges and responsibilities, and it is all too easy for some tasks to end up being rushed or overlooked. One important task that can fall into this category is finding appropriate insurance, and this is where advisers can play a vital role.
Whether a landlord lets one or multiple properties, they need effective insurance to protect them against the consequences of unforeseen events. For example, if a mortgaged property is badly damaged by a fire or flood, tenants will need to find somewhere else to live. In that situation, landlords need an insurance policy that will compensate them for loss of rental income until the property is habitable again.
Landlords also need insurance that will cover the cost of tenants failing to pay the rent for other reasons. The ideal solution is a policy that will not only cover legal expenses incurred when trying to recover debts from tenants, but also one that will meet any costs related to an eviction if this becomes necessary. It should also plug any gaps in income caused by a tenant falling into arrears.
Some policies can replace rental income of up to £2,000 per month for up to 12 months if a tenant is in default, and then for a further three months once the property is ready for a new tenant. A good policy should also insure losses stemming from accidental or malicious damage caused by outgoing tenants.
Landlords with mortgages also need to address some of the same risks that would need to be insured if the mortgage had been used to buy a property for personal use. For example, critical illness cover can help to relieve at least one source of financial stress if the landlord becomes gravely ill. In the event of death, or terminal illness, a mortgage life insurance policy will pay the full value of the mortgage, providing the landlord’s spouse, partner and/or family with peace of mind and financial security during a very difficult time.
Such issues should be considered alongside other aspects of worst case scenario planning. For example, landlords need to think about whether their estate will be liable for inheritance tax in the event of their death and whether they should take further measures to plan for this eventuality. It may also be worth reminding clients of the need to ensure that if they do pass away, their spouse, partner or beneficiaries will be able to find any key information and documents related to buy to let properties forming part of their estate.
Other issues to which new landlords may not yet have given enough consideration include the fact that most properties will be let on a shorthold tenancy, meaning tenants must be given two months’ notice to leave. As such, if the landlord is planning to sell or renovate a property currently occupied by tenants, they will need to factor this two-month notice period into their plans.
Finally, advisers who are discussing these issues with a client before they purchase a buy to let property should encourage them to consider the risk of falling into negative equity. This is not a particularly common problem for most buy-to-let purchasers at present, in part because of the large deposits they are required to put down at the point of purchase, but it is still a risk that they should consider.
After all, if the property is being acquired as an investment for the benefit of the client’s family, they will want to avoid any chance that it might instead become a financial burden upon them. With careful planning and use of appropriate insurance, it should be possible to ensure that this does not happen and that the client has all the protection they need – leaving them to enjoy the maximum financial benefit from their property portfolio.
Simon Hird is head of broker and intermediary at Legal & General