Landlord insurance is not compulsory – think of it as bulked-up home insurance to cover extra perils such as non-payment of rent or damage by tenants – but it can be very costly to go without it if disaster strikes. Our tips help you decide if it’s right for you.
It isn’t a legal requirement but without it you may not be covered if you have tenants
If you’re going to be a landlord, you won’t be breaking the law if you don’t take out specialist insurance. However, if you rent out a property to any kind of tenant and want to be protected in case anything goes wrong, standard home buildings and contents insurance usually won’t cover you – you’ll need a landlord policy instead.
This is because insurers view the risk of renters living in your property – and the chances of them making a claim on an insurance policy – very differently to you, the owner, living in it instead. Two young students who enjoy socialising renting a flat, for example, pose a greater claims risk to an insurer than an older professional couple who own their property.
Also, there may be some cases where a buildings policy is not necessary. For example, if you own a leasehold property in a block of flats and rent it out, you could find the block freeholder has their own buildings insurance which should cover you in the event of any incident such as a leaking washing machine ruining your floor – and the flat below’s ceiling.
Yet not all freeholders will have a comprehensive buildings insurance policy so if you’re in this situation, double-check.
Landlord insurance is ‘bulked-up’ home insurance, covering all the usual, plus tenant issues
Landlord insurance is usually an umbrella term given to different strands of cover bolted together for anyone who owns a home they rent out, and it’s entirely up to you to decide what it includes, though the more you add the more it costs. These are your options:
Buildings cover. To rebuild or repair your home if the structure is damaged.
Cover for YOUR contents. If stolen by someone other than your tenant (see below as there’s separate cover for this) or damaged by fire, flood and more. It will NOT pay out for a tenant’s contents.
Loss of rent. If tenants don’t pay up or are rehoused if your home’s damaged.
Accidental/malicious damage or theft by tenants. If your goods or furnishings are stolen or damaged by tenants.
Legal expenses. If you take action when dealing with tenant disputes.
Public liability. If a tenant or visitor is injured on your property and claims against you.
Property damage due to illegal cultivation of drugs. By your tenant, of course
Eviction of squatters. Where a tenant simply won’t leave.
There are other considerations too: (All of these guides will be available shortly)
HMO Insurance GUIDE
Leasehold Flats – All You Need to Know About Buildings Insurance GUIDE
Buildings Insurance and Mortgage Applications – You Will Need Both When Re/Mortgaging (GUIDE)
Renting Out Your Main Home Insurance (GUIDE)
Making to Make a Claim on Your Landlord Insurance (GUIDE)
Insurers will ask what your tenants do (and may charge more if they’re students or on housing benefit)
When you buy landlord insurance, you’ll be asked what kind of tenant you rent to – usually early on in the application process.
You’ll generally be asked to choose from a dropdown box or to tick a box showing what type of tenant you have. These are the main categories you can choose from:
Those in receipt of housing benefits
A mix of the above
It matters because the type of tenant you rent your property out to will have an impact on how much you pay for landlord insurance. Choose to let to students or those in receipt of housing benefit (and the unemployed) and you’ll pay more.
This is because these groups’ lack of income – or low level of take-home pay – means they’re a higher risk to insurers, which worry you’ll struggle to fill your rental property. In particular, you’ll pay a much steeper premium if you want your policy to cover you for non-payment of rent.
Not every insurer is willing to cover all types of tenant but most will give you a broad choice of tenant categories. However, you must always make it clear to an insurer who it is you’ll be renting to. Fail to do so and you could invalidate your policy.
You’ll need extra cover if the property is left vacant for more than 30 days
Most policies will cover you for a claim if your property’s left empty for a short period, usually 30 days – handy if you’re planning a quick renovation or kitchen overhaul. So if thieves broke in or your property suffered damage from a water leak, you’d get a payout.
But if you know the property is going to be sitting empty for several months – for major works, say – you’ll need to tell your insurer and agree additional cover, or pay extra to take out a separate ‘unoccupied property insurance’ policy to add to your existing landlord cover.
If you don’t, you could find yourself uninsured and out of pocket during that period if the property is taken over by squatters, vandalised or damaged by fire or flood.
You MUST provide smoke and carbon monoxide alarms – if not, you may invalidate your policy
These alarms should be on every floor of the property you’re letting and you’ll need to test them frequently. You also need to make sure the property is safe for tenants – eg, having up-to-date building and electrical installation safety regulation certificates – and carry out any necessary repairs.
Plus, you’ll need to have all gas and electrical equipment checked regularly and ensure it meets safety requirements. Fail to do so and insurers can deem your policy invalid. Your tenants can then take you to court and you won’t be able to use legal cover to fund the claim.
Under new rules being phased in by April 2020, landlords will progressively lose valuable tax relief on their buy-to-let mortgage costs. We explain what the changes mean for you.
What is buy-to-let mortgage interest tax relief? Since April 2017, the way landlords have to declare their rental income has started to change, meaning most will see their tax bills rise significantly. While borrowing money through a buy-to-let mortgage was once a major tax advantage, it’s no longer the case. This guide explains what changes are taking place, how they affect how much tax landlords have to pay. Video: how buy-to-let mortgage tax relief has changed for landlords Our short video explains the tax changes for landlords with buy-to-let mortgages.
Landlord mortgage interest tax relief in 2019-20 Since April 2017, tax relief on mortgage interest has been gradually phased out. By April 2020, you won’t be able to deduct any of your mortgage expenses from rental income to reduce your tax bill. Instead, you’ll receive a tax-credit, based on 20% of your mortgage interest payments.
This is less generous for higher-rate taxpayers, who effectively received 40% tax relief on mortgage payments under the old rules. The new system is being phased in over several years. In 2019-20, you can deduct one quarter of your rental income, while three quarters of your mortgage interest payments will receive the tax credit. As of April 2020, all mortgage interest will only receive the tax credit. For previous years: In the 2017-18 tax year, you could claim 75% of your mortgage tax relief In the 2018-19 tax year, you could claim 50% of your mortgage tax relief.
Why the tax credit is bad news for landlords This new system will potentially increase your tax bill in two ways. If you’re a higher or additional-rate taxpayer, you won’t get all the tax back on your mortgage repayments, as the credit only refunds tax at the basic 20% rate, rather than the top rate of tax paid. Less obviously, you could also be forced into a higher tax bracket because you’ll need to declare the income that was used to pay the mortgage on your tax return. This could push your total income into the higher (£50,000 in 2019-20) or additional-rate (£150,000) tax brackets, depending on your income from other sources, such as your salary or pension.
Mortgage interest tax relief in 2020: an example Going back to our example of a landlord that charges £950 per month rental income, with mortgage interest payments of £600 per month.
They’ll pay tax on the full £11,400 rental income they earn
They’ll still pay £7,200 in mortgage interest
They’ll get a tax credit of £1,440 (£7,200 x 20%)
A basic-rate taxpayer will pay £840 – no increase
A higher-rate taxpayer will pay £3,120 – double the tax
The chart below shows how this is calculated.
Can landlords incorporate to keep their mortgage interest relief? This change in tax relief only affects private landlords – people who own their properties as individuals (or couples), rather than through a business. In theory, by setting up a business that owns their rental properties, landlords will be able to continue to declare rental income after deducting the mortgage. However, if you’re considering doing this is vital to research it thoroughly, as even with this tax saving you could end up far worse off.
There are a few reasons for this, but the main one is that mortgage rates for businesses are more expensive than for private landlords, which could cost more than you’d save in higher tax relief.
You’d also need to pay an extra round of stamp duty when you transfer ownership of the property to the business. You can use our calculator to work out your buy-to-let stamp duty bill.
Finally, if you incorporate your taxes will become more complex. Instead of paying income tax on your rental income, you’ll need to file taxes for your business, and pay corporation tax on your profits.
To receive the rental income, you’ll need to pay yourself a dividend. This will be taxed as income, but at a lower rate than if you’d received the income directly.
A study by Migrate discovered as many as one in 10 renters had been banned from changing provider, despite the fact doing so could save them as much as £300 a year.
Now the auto-switching service is reminding tenants, if they are responsible for their utility bill and pay their energy supplier directly they have the right to switch provider, regardless of whether their landlord has a ‘preferred supplier’.
Migrate said its survey uncovered a number of misunderstandings from private tenants over their energy bills and has estimated tenants could be overpaying for their gas and electricity by a collective £511 million each year.
George Chalmers, CEO of Migrate, said renters were far more likely to remain with the same provider than homeowners.
He added: “No matter what type of tenant you are, if your name is on the energy bill and you pay for your energy directly from a supplier, the likelihood is you have the right to switch your energy supplier and should be doing so regularly to ensure you’re not overpaying.
“Not switching is costing renters as much as £511 million pounds a year. However, migrating energy supplier is easy to do, and with an auto-switching service, you’ll only need to sign up once to receive regular savings of around £316 on average.”
Top five reasons private tenants are not switching (source: Migrate)
Too busy (58%)
Didn’t think they were allowed to switch (53%)
Don’t know how to switch (42%)
Feel switching isn’t worth the effort (14%)
Explicitly told by landlord/letting agent that they were not allowed to switch (13%)
Buy-to-let landlords have been at the receiving end of several changes to the housing market in recent years.
Introduced under former Chancellor George Osborne, the tax and regulatory reforms were part of a shake-up announced in his Autumn Statement 2015 and have hit landlords particularly hard.
The changes came as the government faced pressure to respond to soaring house prices and a rental market that was largely perceived to work in favour of landlords rather than tenants.
Among the changes brought in was an additional 3 per cent stamp duty surcharge which was introduced in April 2016. There has also been the phased abolition of mortgage interest rate tax relief for landlords since April 2017, with the final phase still to come in April 2020.
David Hollingworth, associate director, communications at L&C Mortgages, explains: “From April 2020 landlords will only be able to claim basic rate relief on any mortgage interest costs and will have been having to gradually adjust to what, for many, will have resulted in higher tax bills.”
The rules around lending were also tightened, with the Prudential Regulation Authority bringing in more stringent affordability testing for those borrowers with buy-to-let ambitions.
Mr Robins says that the main tools being used have been effective in making investment in residential property less profitable for landlords.
“In most cases, landlords now have to pay stamp duties at a higher rate than individuals buying property to live in personally,” he explains.
“In England, Wales and Northern Ireland, landlords face a 3 per cent supplementary charge, and in Scotland this is 4 per cent.”
Mr Robins points to multiple dwellings relief (MDR) as an important relief from higher stamp duty rates and as being helpful for landlords building a property portfolio.
He explains: “Under MDR rules, SDLT (stamp duty land tax) and LTT (land transaction tax) is charged on the average price of all of the properties purchased, using residential tax rates including the supplementary charge. In Scotland, bulk purchases qualify for MDR without suffering the supplementary charge.
“In England, Wales and Northern Ireland, this means that landlords need to think carefully about whether it is better to pay stamp duty on the average property price at higher tax rates, or on individual prices at lower tax rates.“
Your sums insured are the values of what you need your policy to cover. The main sums insured you need to calculate are your buildings, contents and property owners’ liability:
Buildings:You should give your insurer the rebuild value of your property, rather than the market value or the price you paid for it. You can use the Association of British Insurers Rebuild Calculator to help you work this out.
Contents: You should give your insurer a total value of the replacement cost of your contents at your rental property. Create an inventory by going to each room, and noting everything you would need to replace in the event of a claim.
Property owners’ liability: You can usually choose a limit of £1 million, £2 million or £5 million. While a lower limit should be sufficient, you may need to choose higher cover if you rent several properties. If you do not give the correct sums to your insurer, you may not be able to recover the full cost of any claims.
Choose the right loss of rent cover
This covers the loss of your rental income if your tenants have to move out because of damage to your property.
It is important to get the right cover to protect loss of rental income, especially if you rely on your rent to pay your mortgage. Your insurer will ask you to specify:
Monthly rental income: Some insurers ask for the monthly figure you earn each month, and others offer a percentage of the rebuild value of your property.
Indemnity period: This is the time you need to claim for while your property is being repaired. You can usually choose between 12, 24 and 36 months. Think about how long it would take to rebuild your property and find new tenants.#
Loss of rent cover is not the same as rent guarantee protection, which covers you if your tenants fail to pay. Here is more information about rent guarantee insurance.
Cover your tenants
Tell your insurer the type of tenants you let to, as this will determine the sort of cover you need and may affect the price of your insurance:
Professional let: Letting to working professionals usually earns you a cheaper premium, because they are considered least likely to cause damage or withhold rent.
Students: Letting to students is usually more expensive, as insurers think they are more likely to cause damage to your property. An insurance broker could help you find specialist student cover.
Department of Social Security (DSS): Letting to tenants who claim housing benefits can be more expensive and you may struggle to get cover. There are insurers who specialise in DSS tenants, and a broker may be able to help you find cheap cover.
Tenants with pets: Some insurers do not cover pet damage, so look for a policy where you can add this if your tenants have pets. Order your good practice guide for letting to tenants with pets from The Dogs Trust Lets with Pets website.
Family members: Most insurers can cover letting a property to family members, but they may require a formal tenancy agreement to be in place.
Decide what optional cover you need
You can tailor most landlord insurance policies to include extra cover you may need, including:
Accidental damage: This covers things like tenants accidentally spilling wine on your carpets, or breaking a window. Some insurers include this as standard, but you usually have to add this for an extra cost.
Malicious damage by tenants: This covers tenants deliberately damaging your property. It costs more to add this to your policy, but is worth considering if you have had problems with tenants damaging your property before.
Pet damage: This covers property damage claims caused by pets, for example scratched flooring or chewed furniture. The Dogs Trust Lets with Pets have more advice about letting to tenants with pets.
Rent guarantee: This covers lost rent if your tenants stop paying, and includes legal expenses to help with evicting problem tenants. You may be able to add this to an existing landlord policy, or you can look for standalone cover on our comparison.
Home emergency: This provides immediate assistance, for things like burst pipes or boiler breakdown. You can give the home emergency claims number to your tenants, so they can report problems to your insurer straight away.
Look at specialist insurance
Some properties need more specialist cover than others, so speak to an insurer who can offer the right cover for your circumstances: Houses of multiple occupancy (HMOs)
A property is classed as a house of multiple occupancy if both of the following apply:
More than three tenants live there, who are not family members
Your tenants share a toilet, bathroom or kitchen
If you own an HMO you may need a licence from your local council, and there will be a number of extra responsibilities you will need to meet.
Some insurers cannot offer cover for HMOs or will charge more. If you have an HMO, an insurance broker can help you find specialist cover.
If you own several rental properties, it could be cheaper for you to insure all of them on one portfolio policy.
Most landlord insurers offer a discount for covering more than two properties under one policy, and you get the convenience of one policy document and one renewal date.
You should still compare single landlord policies to make sure you get the right cover for you at the best price.
Most landlord insurance policies include full unoccupied property cover for a period of 30 days. This means you still get full cover while your property is empty.
Some insurers offer unoccupied cover for longer periods, for example 90 days, but once this time is up you must meet the following conditions:
You must notify your insurer that the property is empty
You must visit and check the property every seven days
Water, gas and electricity must be switched off at the mains*
All doors and windows must be locked
All rubbish should be removed from the property
*Unless the electricity is supplying a security alarm.
If you fail to meet these conditions while your property is unoccupied, you may lose cover and your insurer will refuse any claims you make.
If your rental property will be empty for a long time, look at getting specialist unoccupied property insurance.
Pick your excess
Most insurers let you pick your excess, which affects how much you pay for your insurance. You can also pick different excesses for each section of cover.
A lower excess often means you pay more, but a higher excess may give you a discount.
Here is how to save money on your landlord insurance
Keep your insurer up to date
Once you take out cover, it is important to keep your insurer up to date with changes like:
Getting new tenants
The property being empty
Increases in rent
Increases in rebuild value or contents
Building works or refurbishments
Your insurer may refuse to pay your claims if you fail to inform them of changes to your circumstances, so make sure you call them to update your details as soon as possible.
When you buy a property as an investment, you won’t be able to fund your purchase with a normal residential mortgage. Instead, you’ll need a specialist buy-to-let mortgage. The good news is that there are lots of deals out there, whether you’re a first-time landlord, an ‘accidental’ landlord, or an experienced investor. The bad news, however, is that the rules around buy-to-let mortgages can be a bit of a minefield. In this guide, you can learn the basics of how buy-to-let mortgages work and get to grips with how lenders will calculate your affordability.
How do buy-to-let mortgages work?
The vast majority of buy-to-let mortgages are provided on an interest-only basis. This means that, for each month of the mortgage term, you’ll only pay the interest on the loan, and none of the capital. While this can be good news in the short term as your outgoings will be less each month, it’s imperative that you have a plan in place to either pay off the full loan or refinance at the end of your mortgage term.
How much deposit do I need for a buy-to-let mortgage?
To get a mortgage on an investment property, you’ll usually need a deposit of at least 20-25% of the value of the home. And, as with standard residential mortgages, the bigger the deposit you put down, the better the rate you’ll be able to get. The best buy-to-let deals are usually only available to investors with deposits of 40% and above. When assessing your affordability, lenders will consider your current portfolio (more on this later) and any previous history of obtaining and paying off buy-to-let finance. Buy-to-let mortgage rates and fees Buy-to-let mortgage rates have remained steady recently after some considerable drops in recent years. In September 2019, the average fixed-rate buy-to-let mortgage had an interest rate of 3.15%, down from 4.26% five years earlier, according to data from Moneyfacts. Variable-rate deals followed a similar pattern, with rates dropping from 4.04% to 3.1% between 2014 and 2019.
Mortgage rates for buy-to-let companies
Cuts to mortgage interest tax relief and wear and tear allowance have resulted in some landlords setting up company structures for their buy-to-let portfolios. Company buy-to-let mortgages make up a relatively small percentage of the market, but they are on the rise – in fact the number of company mortgages on the market tripled from 80 to 235 between 2016 and 2018, resulting in more than 250 deals being available to investors. But moving to a company structure isn’t the best move for everyone, as the interest rates on these deals tend to be significantly higher than those available to individual borrowers. Which? research in spring 2019 found that the initial rate on an equivalent fixed-rate mortgage was around 1% higher for companies. Find out more: discover how your profits could be affected by changes to mortgage interest tax relief.
How to compare buy-to-let mortgages
While headline rates can be attractive, it’s especially important to look beyond the initial rate when choosing a buy-to-let mortgage. That’s because these products have traditionally come with higher up-front fees than traditional mortgages. If you take out one of the market-leading deals, you might need to pay as much as £2,000 up front, and while some lenders are beginning to offer cashback incentives and reduced fees, these offers make up a relatively small proportion of the buy-to-let market.
Affordability rules for landlords
There are plenty of enticing mortgage offers out there for landlords, but you’ll need to prepare yourself for strict affordability tests. That’s because in recent years, the Bank of England (BoE) has looked to cool what it considered to be an overheating buy-to-let market by imposing tougher lending restrictions.
Interest cover ratios on buy-to-let mortgages
As part of their affordability assessments, lenders use interest cover ratios (ICRs) to calculate how much profit a landlord is likely to make. A lender’s ICR is the ratio to which a property’s rental income must cover the landlord’s mortgage payments, tested at a representative interest rate (most banks currently use 5.5%). Lenders are required to test at 125%, meaning the projected rental income must be at least 125% of the landlord’s mortgage payments, but many impose higher levels of around 145%.
Mortgages for portfolio landlords
Professional landlords with four or more properties are often described as ‘portfolio landlords’. This is an important distinction, as rules introduced by the BoE’s Prudential Regulation Authority in October 2017 made it harder for these investors to access additional finance.
Portfolio landlord stress-testing
Previously, portfolio landlords could provide their overall profit/loss figures when applying to borrow more money or remortgage a home in their portfolio, but this has now changed. Instead, you’ll now need to show mortgage details, cash flow projections and business models for every property you own when applying for finance. If you have a heavily mortgaged portfolio, you may find that these regulations make it more difficult for you to obtain extra funds.
Maximum portfolio size and ICR increases
Portfolio landlords also face some other restrictions, which are set from lender to lender. For example, some lenders will set a maximum number of properties you’re allowed to have in your portfolio (up to 10 being the most common) and others use different ICRs and representative interest rates depending on how many properties you have. Other rules imposed by individual lenders include limits on maximum loan-to-value (LTV) ratios across a portfolio (for example, your overall portfolio must be at 65% LTV or lower) or the stipulation that the ICR from every property in your portfolio must be above 100%.
With landlords struggling to get finance, some banks have begun to adopt a more holistic approach to lending by introducing a system known as ‘top slicing’. Top slicing takes into account a landlord’s personal income away from their portfolio – such as a salary or pension – and includes it in affordability assessments. This means that if you have significant earnings away from property, you could theoretically use your personal income to bridge any shortfall when you’re assessed by lenders. Only a handful of lenders currently adopt this approach, so if you think top slicing could benefit you, it’s best to discuss this with a mortgage broker.
Remortgaging for landlords
A raft of taxation changes – including cuts to mortgage interest tax relief and the 3% stamp duty surcharge for property investors – has resulted in many landlords deciding to refinance their portfolios rather than adding to them. Indeed, data released by UK Finance in September 2019 showed that the number of landlords remortgaging had increased by 2% year-on-year. One trend in the remortgaging market is lenders are cutting up-front fees to entice landlords.
Accidental landlords: switching to a buy-to-let mortgage
Not everyone who becomes a landlord necessarily sets out to do so. For example, you might have inherited a property, or a change in your circumstances may have resulted in you moving back to the rented sector and choosing to let out your home. Regardless of how you’ve become a landlord, it’s vital that you tell your mortgage lender if you’re going to let out a home that has an outstanding owner-occupier mortgage. Buy-to-let properties carry greater risks for lenders, so if you don’t tell your bank you could theoretically be invalidating your mortgage. Some lenders will grant you a ‘consent to let’ on your current deal, while others may insist on you switching to a buy-to-let mortgage.
Uinsure has been awarded a Defaqto Five Star rating for the seventh consecutive year.
The provider’s home insurance product has been given Defaqto’s highest possible rating since 2014, with its buy-to-let/landlord Insurance product having done the same since 2015.
In addition to its Defaqto Five Star ratings, Uinsure has also received the same rating from Moneyfacts for its home insurance and home emergency products.
Paul Kelly, director of product development at Uinsure, said: “We are delighted to again be awarded the highest possible ratings from Defaqto. Ensuring we’ve got a fantastic range of high quality products is always the priority for Uinsure, and we haven’t stopped in ensuring that our GI proposition leads the way.
“Receiving the highest quality Five Star rating for our home insurance, home emergency and landlord Insurance is testament to our quality products and exemplary service.”
Those who want to start renting out homes or who want to purchase a small duplex or apartment building to lease to tenants will want to ensure they do not have any issues that will cause their income to disappear. One of the best ways to protect the investment is to have an insurance policy. If anything does happen, they’re protected against financial losses. Some of the coverage a landlord insurance policy can provide includes the following.
Loss of Income
If the apartment is deemed uninhabitable while a tenant is there or after they leave due to mold, severe property damage, or other issues, the landlord may be protected against the loss of income while repairs are completed. Companies like Roger Butler Insurance will offer different amounts of coverage against loss of income, so it’s a good idea to look into how much it can cover if something happens. This could help the landlord avoid significant losses if they have to spend months rehabilitating the property.
Landlords can be held liable if a tenant or guest is injured on their property. For instance, if the railing on the stairs isn’t properly secured and a tenant using the railing ends up falling, the landlord may be required to pay the tenant’s medical bills. Liability protects the landlord and covers the medical and other expenses of tenants or guests injured on the property. Depending on the insurance and the situation, it may also cover legal assistance for a landlord who is sued for negligence because of an injury on their property.
Natural disasters can cause significant property damage that could be expensive and time-consuming to repair. If this happens, the landlord can use their insurance policy to cover the damages done during the natural disaster. It is important to note that most insurance policies do not cover flooding under property damage as flooding insurance is purchased separately. However, any other damages caused by a natural disaster should be covered under the policy.
Landlords who do not live locally may want to purchase extra insurance to cover certain emergencies. This helps to cover their travel expenses if they need to travel a significant distance to handle emergency repairs for the property. While landlords who live far from their property may have other options like getting a property management company, this coverage can help as well.
Flooding can be covered by landlord insurance but, as mentioned previously, it does often need to be purchased separately. In most cases, flooding insurance is relatively inexpensive, so it’s worth considering, especially if the property is in a flood zone. If there is a natural disaster or other issue that causes flooding, this addition to the policy can help cover the repairs needed to restore the building.
If you’re considering becoming a landlord or you already own a building that has tenants, landlord insurance is something necessary. While you may not be required to have it, there are a lot of things that can’t be predicted that could end up costing you a ton of money. Landlord insurance can help you protect against it. When you’re buying a policy, look for the coverage included here as well as find out what other coverage is available to ensure you have as much insurance as you might need.