Protection For Buy-To-Let Landlords
Landlords tend to insure the building thoroughly and themselves not at all.
Buildings insurance is a condition of the mortgage, so it gets arranged. Life cover is not a condition, so it often does not, and the result is a second substantial debt with no provision for what happens if the person responsible for it is no longer there.
The structure of these mortgages makes it sharper than it sounds, because most of them are not repaying anything.
The short answer
A buy-to-let mortgage is debt in your name that nobody requires you to insure, and it is frequently interest-only, so the full capital is still owed at the end of the term. If you died, the property would pass to your estate with the mortgage attached, and the people inheriting would have to take it on, refinance it or sell, which is the gap life cover closes.
What this changes
- You now owe a second mortgage, and no lender has asked you to insure it
- Buy-to-let lending is commonly interest-only, so the full capital is owed at the end
- The property and its mortgage would pass to your estate, and to whoever inherits
- Rental income depends on the property being let, which it is not always
- The mortgage payments continue through void periods and arrears
- Rental income is generally treated differently from earned income when arranging cover
The bit people miss
Interest-only is what makes this a real exposure rather than a tidy one. On a repayment mortgage the debt shrinks every month, so time is on your side. On an interest-only buy-to-let the balance is the same in year nineteen as it was in year one, and the plan is usually to sell the property or refinance at the end. If you die before that, the people inheriting receive a property with the full original debt attached, and their options are to keep it and service the mortgage, refinance it in their own names, or sell into whatever market exists that year. None of those is necessarily bad. All of them are decisions made under pressure that money would have made easier.
Level Cover, Not Decreasing
The usual default for mortgage protection is decreasing term cover, which falls in line with a repayment mortgage and is cheaper for that reason.
Applied to an interest-only buy-to-let it is the wrong instrument. The debt is not falling, so a policy that is falling leaves a widening gap every year, and at the end of the term when the full capital is due the cover is at its smallest.
Level term cover stays at the same amount throughout, which matches how the debt actually behaves. It costs more than decreasing cover, and on a portfolio of more than one property it is worth looking at how the policies are arranged overall rather than insuring each mortgage separately without a plan.
Rental Income Is Not Earned Income
Landlords often assume income protection will cover the rent if something goes wrong. It is worth understanding why that is generally not how it works.
Income protection is designed to replace income you earn from working, because the trigger is being unable to work through illness or injury. Rent arrives whether or not you are well, so it is generally treated differently, and how a particular insurer looks at it is not something to assume either way.
For most landlords this matters in a specific way. If you have a job or a business as well as the property, income protection is about that earned income, and the buy-to-let mortgage is one of the commitments it would help you keep paying. If the rental income is your main income, the position is different and genuinely worth a conversation, because the answer depends on the insurer and on your circumstances rather than on a general rule.
What usually fits, and why
Sized against the buy-to-let balance as well as your residential mortgage. On interest-only lending the amount does not reduce, so level term cover usually fits better than a decreasing policy.
Worth a careful conversation. This cover is generally based on income from your work rather than rental income, so what it can do for a landlord depends on your wider earnings and on the insurer.
Pays a lump sum on diagnosis, which can clear or reduce a buy-to-let balance at a point when managing a property is the last thing you want to be doing.
Common questions
Do I need life insurance for a buy-to-let mortgage?+
No lender normally requires it, which is why so many landlords do not have it. Whether you need it depends on what would happen if you died: the property and its mortgage pass to your estate, and whoever inherits has to service it, refinance it or sell. Cover gives them the option rather than the obligation.
Should it be level or decreasing cover?+
On an interest-only buy-to-let, level cover usually fits better, because the debt is not reducing. Decreasing cover falls over time, so it would leave a widening shortfall and be at its lowest exactly when the full capital falls due at the end of the term.
Will income protection cover my rental income?+
Generally not, because income protection replaces income from working and is triggered by being unable to work. Rent is not earned in that sense. How individual insurers treat rental income varies, so it is worth asking about your own situation rather than assuming it is or is not included.
What happens to the property if I die?+
It passes to your estate with the mortgage still attached, and then to whoever inherits under your will or the intestacy rules. They would need to take on the mortgage, refinance it in their own name or sell the property. Having cover in place means that is a choice rather than something forced by timing.
I have several properties. Does that change things?+
It usually means looking at the total borrowing rather than insuring each mortgage separately, because a portfolio arranged policy by policy over years tends to end up uneven. Worth reviewing as a whole, including the term, since interest-only balances all fall due at some point.
Cover that often goes with this
The gaps we most often find sitting next to this one.