At first glance, there might seem little difference between a dwelling in which the owner occupier lives and one that is let to a tenant – despite the difference in tenure, both are homes, with a building and its contents broadly vulnerable to similar risks and perils.
As far as mortgage lenders and insurers are concerned, however, there is a world of difference.
The Council of Mortgage Lenders stresses the difference between a standard residential mortgage arranged by a prospective owner occupier and a buy to let mortgage sought by a landlord.
The difference turns largely on the mortgage lender’s assessment of the affordability of the advance to the home owner and to the landlord. In the first case, affordability is likely to be calculated with reference to the borrower’s income from employment, but in the case of a buy to let mortgage, affordability depends on the rental income likely to be received by the landlord (after the deduction of the costs and expenses involved in letting the premises to tenants.
In other words, a buy to let mortgage reflects the property’s intended use as a business.
This is further reflected in the way the two different types of mortgage are regulated. The owner occupier – who stands to lose his home if things go wrong – has the full protection of the Financial Conduct Authority (FCA); the businessman landlord does not.
The distinction drawn by mortgage lenders is one that is also followed by insurers – the risks and perils to which an owner occupied home is exposed and those of tenanted premises are significantly different.
Standard building and contents insurance is appropriate for the owner occupier, therefore, but specifically written landlord insurance is necessary if the dwelling is let to tenants. The use to which the dwelling is put, determines the type of insurance required
The distinction is very important to any property owner looking to safeguard his or her investment by arranging insurance cover.
If the owner of buy to let property has mistakenly arranged standard home insurance (suitable for the owner occupier) any claim may be rejected on the grounds that the premises are in fact occupied by tenants and the policy will become void.
Not only that, but your mortgage lender could ask you to repay the outstanding mortgage amount immediately, as you will have breached the terms of your contract with them in not having the correct type of buildings insurance.
If you are the owner of tenanted property, therefore, the only suitable cover is landlord insurance.
This applies even if you are an accidental landlord – the owner of property that you decide to let but without consciously seeking to build a business as a buy to let landlord. Indeed, it might be argued that the accidental landlord may be all the more confused about the distinction between standard home insurance and landlord insurance.
Evidence for the extent of confusion about landlords’ need for suitable insurance cover may be found on various online discussion threads, including that maintained by the website Landlord Zone.
So, what makes suitable landlord insurance – what does it cover?
Some of the confusion may arise because insurance of the building and its contents is as much a concern for the owner occupier as for the landlord. Although all insurance policies of course vary in their details from one policy to another, insurance for landlords typically has at its core:
- cover for the structure and fabric of the building itself against such potentially major incidents as fire, flooding, impacts, vandalism and theft;
- similar cover for those contents of the let property that are owned by the landlord (tenants’ possessions need to be insured separately by the tenants concerned);
- in the case of some landlord insurance policies, it may also be possible to safeguard against malicious damage caused by the tenants themselves.
An equally important component of landlord insurance is public liability indemnity – protection against the potentially very costly claims made by tenants, their visitors or members of the public who may have suffered injury or had their property damaged as a result of the landlord’s breach of his duty of care.
This element of cover is necessary because of the landlord’s particular responsibility for the safety of tenants, visitors and members of the public. If it is shown that the landlord’s actions – or failure to act – amount to negligence in his duty of care, a substantial claim in compensation may follow.
As already mentioned, the landlord – and even the accidental landlord – is effectively engaged in a business. Business income is generated through rents charged, and the aim is to keep that income at least equal to the costs and expenses (including any mortgage repayments) incurred in letting the property.
For that reason, if the let premises becomes temporarily uninhabitable following an insured event, landlord insurance typically offers compensation for the resulting loss of rental income.