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guidesA rental guarantee scheme aims to provide landlords with a guaranteed rental income, even if a tenant fails to pay rent or the property is temporarily vacant. Read on to find out more and understand how this can impact securing a buy to let mortgage.
Rental guarantee schemes should not be confused with rent guarantee insurance/rent protection insurance, which is cover a landlord can take out as a financial protection against tenants not paying rent owed, there is more on this below.
Rent guarantee schemes are offered by a range of organisations including:
- Local authorities
- Housing associations
- Letting agents
- Specialist providers
They can be linked to tenants who may be considered higher risk by the private rental market, but that is not always the case, sometimes developers or private organisation will offer rental guarantee schemes as either an incentive to buy property (developers) or a business model to generate income (private organisations).
Instead of relying solely on the tenant’s ability to pay rent, the landlord receives assurance that rent will be paid by a third party for an agreed period and amount. The aim is to reduce income risk for landlords while, in some instances, supporting access to housing for tenants who may otherwise struggle to secure a private tenancy or as a business model for a private organisation to monetise, whilst reducing risk to the landlord.
Rental guarantee schemes can vary significantly in structure, duration, and terms, which is why it is important for landlords to understand how they work and how lenders view them when applying for a buy to let mortgage.
Why rental guarantee schemes exist
Rental guarantee schemes are often used to address housing shortages and affordability issues in the UK. Local councils and housing providers use them to help place tenants who may be on lower incomes, receiving benefits, or transitioning out of temporary accommodation.
Private organisations make money from these schemes by charging a tenant more rent than is passed on to the property owner.
From a landlord’s perspective, these schemes can offer a level of income certainty that may not always be present with a standard tenancy. This can be appealing during periods of economic uncertainty or when letting to tenants who might not meet traditional referencing criteria.
However, the involvement of a third party changes the risk profile of the tenancy, which is where lender considerations come into play.
Common types of rental guarantee schemes
There is no single standard rental guarantee scheme in the UK. The most common types include:
Local authority rent guarantees
Councils may guarantee rent for a fixed period, often between six and twelve months, to encourage landlords to accept tenants nominated by the authority. Payment may be made directly to the landlord, even if the tenant stops paying.
The rent will be based on the Local Housing Allowance (LHA), which is used to calculate what housing benefit private renters will receive based on, where in the country the tenant lives, how many people are in their household and local rent levels.
It is worth bearing in mind though that this does not necessarily mean LHA is in line with current market rents, as the rate can and has been frozen by the UK government on many occasions.
Housing association leasing schemes
In these arrangements, the landlord leases the property to a housing association for a fixed term, often three to five years. The housing association then manages the property and guarantees rent, regardless of occupancy.
Letting agent rent guarantee products
Some letting agents offer rent guarantee insurance or contractual guarantees as part of their management service. These are usually insurance-backed rather than council-supported.
Corporate or supported housing arrangements
In some cases, a company or charity rents the property and guarantees the rent while subletting to occupants. These structures can look more like commercial agreements than standard residential tenancies.
Each of these can have very different implications for mortgage lenders.
How rental guarantee schemes differ from rent guarantee insurance
It is important not to confuse rental guarantee schemes with rent guarantee insurance.
Rent guarantee insurance is a policy taken out by the landlord, usually alongside landlord insurance, which pays out if a tenant defaults on rent. The tenancy itself remains a standard private tenancy, and the insurer steps in only after certain conditions are met.
A rental guarantee scheme, by contrast, often involves a third party being directly responsible for rent payments or holding a lease interest in the property. This difference can materially affect how lenders assess the arrangement.
Why lenders are concerned about rental guarantee schemes
Not all buy to let mortgage lenders will accept properties in rental guarantee schemes, but some will.
The challenge for the lender is that they are lending money to the property owner (the landlord), but the tenant is not paying the rent that is intended to cover the mortgage payment to the landlord, it is going to a third party company.
So, if it were to come to an extreme circumstance where the landlord was not paying the mortgage, but the tenant is paying the rent in good faith, the lender has the complexity of not knowing who they need to approach to settle the debt and issues regarding evictions, if a repossession were to take place.
Where the third party running the scheme and letting the property is a council or housing association, the lender knows that type of organisation has to keep the property up to a certain standard of living and will also be easier to work with if they have to take possession or redirect where the rent is paid.
A private organisation is a lot harder for a lender to do due diligence on, they don’t know what that organisation’s motivations are, how they approach letting the property or what their reputation is.
These complications are why some lenders will not accept property on rental guarantee schemes, but some will.
The role of specialist mortgage advice
Because rental guarantee schemes sit outside standard letting arrangements, mortgage advice is particularly important.
A broker experienced in buy to let mortgages and specialist lending can:
- Identify lenders that accept specific schemes
- Advise on loan to value limits and other lender criteria
- Discuss your case with lender contacts to mitigate the risk of your application being declined
In many situations, early advice can prevent landlords from entering schemes that later restrict their borrowing options.
Final words on rental guarantee schemes
Rental guarantee schemes can offer UK landlords income certainty and reduced risk, particularly when letting to tenants supported by councils or housing organisations. However, they also introduce complexities that can affect buy to let mortgage eligibility, lender choice, and future flexibility.
For landlords considering a rental guarantee scheme, understanding how lenders view these arrangements is essential. What looks like a low-risk income stream on paper may not align with standard buy to let criteria.
Taking advice before committing to a scheme, and before applying for a mortgage, can help ensure that rental security today does not limit financial options tomorrow.