Two people sat at a wooden desk, one person holding a pen over some paperwork. There is also a calculator, pen and mug on the desk

Categories: epc | evictions | second charge

Insurance companies have seen an upsurge in landlords taking out additional insurance, as they are hit with higher interest rates and cost increases associated with rental sector reform.

Quotezone has cited a 37% increase in landlord insurance for the first quarter of 2022, compared to the same period last year. This is likely to be due to the demand for more rental properties, but also for landlords to cover themselves, ahead of the proposed rental sector reforms.

Greg Wilson, founder of the property insurance comparison site Quotezone says of this increase:

“It’s unsurprising that landlords have been keen to protect their incomes over the last few months. Although the buy-to-let market has been blooming, it is about to come under pressure from increases in taxes, interest rates and EPC reforms which will require some landlords to make costly energy efficient updates to their property”

He goes on to explain:

“This will contribute to a squeeze in landlord income, so it’s essential that they take all the necessary precautions such as insurance, to help weather the storm and avoid any additional unexpected costs. Policies that include ‘rent guarantee insurance’ can also cover them if a tenant stops paying their rent”.

Rent guarantee insurance will be a welcome support to landlords faced with rogue or non-paying tenants, especially once the government begin to phase out Section 21 evictions. The notice is the “non-fault” route to reclaiming possession of a property. Due to abuse of this in the past by a minority of landlords, the government plans to abolish the notice altogether.

The average cost of landlord insurance is £170 per property. It is suggested that without insurance, landlords could risk losing up to 45% of their revenue, through accidental or deliberate damage to their properties.

So, while landlords will still be able to evict tenants for anti-social behaviour under the new legislation, the damage protection it offers to their properties will help to ease the financial discomfort from having to cover repairs.

Covering the cost of EPC upgrades

Landlords are also faced with the additional cost of having to upgrade their properties to meet the new EPC requirements. All properties must have an EPC rating of at least C by 2025, though landlords are expected to fund the cost of the upgrades without any government support.

Those who haven’t made the necessary amends, by 2025, will not be allowed to re-let the property until it meets the EPC requirements. This is extended to 2028, for those with existing tenants, as some upgrades are more difficult to complete when a property has tenants still residing in it.

Analysis has been conducted on the cost of upgrading properties, to ensure they meet the new EPC requirements. Findings show that one bedroom flats are likely to cost around £3653, a small mid-terraced house could cost around £6,400 and a large detached home could cost as much as £12,540. With those numbers being so high, it’s no surprise landlords are reviewing their property insurance.

Raise capital with a remortgage, or second charge borrowing

As well as mitigating the risk of property damage, covering the cost of EPC upgrades is currently top of the agenda for landlords. There are two potential routes to raise funds from the property itself.

If you have equity in your property, you can look to raise capital when you come to remortgage. Many landlords are remortgaging at the moment, given rises in mortgage rates, influenced by Base Rate rises, which is being driven by inflation. So, it could be a good time to factor those costs in.

Where landlords are still inside the early repayment charge period of their existing mortgage, the other option is to place a second charge on the property, to raise funds.

Essentially this is second mortgage which sits alongside your existing borrowing, it does not touch the existing mortgage.

Equity in the property is still required, and you will need to check with your existing lender as to whether they permit second charge borrowing. But, some investors find this alternative form of borrowing an invaluable solution.