Rent arrears can occur if your tenants either can’t or won’t pay their rent. While you can reduce the risk of this happening by vetting and acquiring references for potential tenants, there is no way of knowing for sure if a tenant will go into arrears.

There are a number of factors that could cause rent arrears, and an individual’s financial situation could change at any time. This is why having suitable cover in place, such as rent guarantee insurance, can help. You may also request that your tenant nominates a guarantor when signing the tenancy agreement, who can be liable for rent payments if they are missed.

With consumer body Which? reporting around 700,000 households missed rent or mortgage payments in a one-month period in 2023, how likely is it that you could face rent arrears from your tenants in 2024?

What could cause your tenants to go into rent arrears?

To help you be prepared for all eventualities, let’s look at some circumstances that could lead your tenants to fall into rent arrears.

Change in income

If a tenant loses their job or has a reduction in hours, this loss of income could be the difference between paying their rent on time and not being able to afford it at all. Similarly, unreliable types of work such as casual employment, zero-hours contracts and self-employment could lead to fluctuations in income, resulting in financial instability. As a result, some months may be harder than others when affording rent, bills and other expenses.

A 2023 survey of 2,003 private renting adults in England from housing charity Shelter found that one in two working private renters in England wouldn’t have enough savings to pay their rent for more than a month if they lost their job. 51% of the survey respondents stated they would be unable to pay their rent for less than a month from their savings.

Private renters who would be unable to pay their rent for less than a month from their savings if they were to lose their job. 

Source: Half of working renters only one pay cheque away from losing their home - Shelter England

Illness or injury

A serious illness or injury can also result in a loss of income if a tenant is unable to work, for example. The impact of this can vary depending on their workplace’s policies and whether your tenant has suitable cover such as income protection. Injury or illness of a tenant’s child can have a similar impact, particularly if your tenant must stop working to care for their child full-time.

Rising rent prices

While landlords can typically look to increase rent prices after a one-year period in a periodic tenancy, it can be important to first consider how this will impact your tenant’s ability to afford rent. Unreasonable increases could be the cause of tenants falling into arrears, so you may need to balance profitability with affordability when setting rent prices and consider the local market rent prices.

Cost of living

As well as the affordability of rent itself, it can be important to also consider your tenant’s overall cost of living. The cost of living crisis in the UK continues to cause challenges in 2024, with the Office for National Statistics (ONS) showing that 46% of adults in Great Britain reported an increase in their cost of living in February 2024 compared to the previous month. ONS data also shows that low-income households are the most affected by the rising cost of living.

With the rising cost of food, fuel, and household bills, this can put tenants at risk of falling into arrears.

Life changes

Major life changes such as divorce or the birth of a child can incur expensive costs. A death in the family and the associated funeral costs can also cause financial difficulties. Tenants facing life changes such as these may find it more difficult to continue to afford their rent as a result.

Emergency costs

Tenants can have fewer emergency costs to worry about compared to homeowners, but there are still some situations to consider. For example, car repairs or the need for a new car could set your tenants back financially if they were not prepared for it. This could then have a knock-on effect for them being able to afford rent, bills and other expenses.

Reduction in benefits

If your tenant relies on benefits for all or part of their income, then any changes to these payments could also affect their ability to pay rent. This may include Universal Credit, Housing Benefit, child benefits, Jobseeker’s Allowance, and others. Changes to your tenant’s circumstances that result in a reduction in benefits could leave them struggling to afford rent.

This is even more of a risk during the cost of living crisis. From September 2022 to September 2023, benefits received increased by 6.7% compared to an 8.2% rise in the cost of living, which could leave those in receipt of benefits struggling to pay their rent.

What happens if your tenants go into rent arrears?

While it can be important to be understanding of tenants’ circumstances and challenges, rent arrears ultimately impact your rental income, which could leave you at risk of missing mortgage payments on the property.

If a tenant is a few days late paying rent, you might want to get in touch to remind them. In some cases, it may just be that they forget to make the payment and a reminder is all that’s needed.

The NRLA has also produced a guide for managing arrears and avoiding possession claims to help landlords communicate with tenants about rent arrears.

Services such as Shelter and Breathing Space can help to support tenants experiencing financial difficulties. Another option is to offer your tenant a repayment plan.

If tenants do go into arrears, rent guarantee insurance can help keep you covered. Rent guarantee insurance is designed to help protect landlords from some of the financial losses that can occur as a result of tenants failing to pay their rent. This insurance can typically cover rent arrears and legal costs associated with the eviction of a tenant who has not paid their rent. As can be the case with any insurance policy, landlords should carefully review the terms and conditions to ensure the cover is suitable for their needs.

Legal Expenses and Rent Guarantee Insurance from Rentguard

You can take every step to make your buy-to-let investment successful, but despite your best efforts, some situations are unpredictable. Legal Expenses and Rent Guarantee Insurance can help to provide peace of mind that if issues out of your control occur, such as a tenant failing to pay rent and remaining in the property, you have suitable cover in place.

Or speak to our specialist team on 0333 000 0169.

 

The sole purpose of this article is to provide information on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited, trading as Rentguard and National Residential Landlords Association, an Introducer Appointed Representative of Arthur J. Gallagher Insurance Brokers Limited, accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.

National Residential Landlords Association is an Introducer Appointed Representative of Arthur J. Gallagher Insurance Brokers Limited, which is authorised and regulated by the Financial Conduct Authority. Registered Office: Spectrum Building, 55 Blythswood Street, Glasgow, G2 7AT. Registered in Scotland. Company Number: SC108909. Rentguard is a trading name of Arthur J. Gallagher Insurance Brokers Limited.