The cost of living is rocketing. Inflation hit 5.4% in the year to December 2021 – it’s highest rate in 30 years – and the Bank of England predicts that it will reach 6% in the spring. Meanwhile, the Resolution Foundation reports that real wages officially began to fall in November 2021, dropping 1% compared to the same month in 2020. And with fuel prices set to rise by an average of £693 per year in April, the situation looks set to get worse before it gets better.
The sharply rising cost of living has a wide-ranging impact. One area where this is already being felt is in the private rented sector, where demand for rental guarantor services is spiking. As such, Finance Derivative put Graham Hayward, Chief Operating Officer of Housing Hand, under the spotlight to find out more.
What are rental guarantor services?
Rental guarantor services are a way of achieving peace of mind for tenants and landlords alike. They are available to working professionals and students, including those renting private accommodation, those renting Build to Rent/co-living homes and those living in purpose-built student accommodation.
Those who don’t have a UK-based guarantor may struggle to access the accommodation they want. A rental guarantor service will provide this guarantor, thus opening up a greater choice of renting options to the tenant.
The rental guarantor service guarantees the rent for the duration of the tenancy. If the renter is unable to pay, the guarantor service steps in and pays their rent for them, so that the landlord doesn’t end up out of pocket.
What’s the difference between a company guarantor and a rental guarantor company?
There’s an important distinction to be made here between a company that acts as a guarantor and the service from a rental guarantor company described above.
A company guarantor is where a business agrees to act as a guarantor for one of its employees. The arrangement isn’t underwritten by an insurance company and, as such, carries the risk that the company may be unable to pay should the need arise. The business could also be unwilling to do so, leading to a protracted disagreement that costs all parties in terms of their time as well as their wallets.
A rental guarantor company, meanwhile, is underwritten by an insurer, providing a reliable, professional service.
Why is demand for rental guarantor services increasing?
An increasing number of people are worried about being able to pay their rent. Financial worries are being felt right now both by renters and by those who, in a happier economic environment, might stand as personal guarantors for them.
At the same time, a growing number of landlords are seeking reassurance that they’re not going to end up with tenants who default on their rent payments. This combination of factors means that rental guarantor services are very much in demand right now.
Rising inflation certainly plays a key role here, with renters beginning to notice the impact of rising prices. Rents went up by 8.3% on average across the UK during 2021, according to Hometrack’s UK Rental Market Report, and by 10.3% in London. With food, fuel and energy costs all rising too, life is getting much more expensive for the average tenant.
Landlords are also feeling the squeeze, with interest rates rising twice in the last three months: by 0.15% in December and then again by 0.25% in February. That means anyone on a variable rate mortgage is going to be noticing the difference. And it seems likely that further rate rises will take place during 2022, as the Bank of England moves to try and slow the economy down to curb the impact of inflation.
Against this economic backdrop, both tenants and landlords are looking for reassurance – and that’s precisely what rental guarantor services provide.
What are the benefits to landlords of using a rental guarantor service?
From the landlord’s perspective, having a tenant who uses a rental guarantor service means they are guaranteed to receive their rent, even if the tenant becomes unable to pay. Obviously, this delivers peace of mind for the landlord, but it’s important to be careful of the terms of the guarantee. Some guarantees will only pay out while the tenancy ends, for example, while others allow the landlord to claim during the tenancy. Some also use complicated and potentially cost-incurring adjudication processes, so that’s something that landlords need to look out for as well.
And how does a rental guarantor service benefit tenants?
Tenants also get peace of mind from the arrangement. They know that, if they become unable to pay their rent, they won’t lose their home, as the rent will be paid by the guarantor service.
In addition, having a rental guarantor service in place can avoid the need to stump up six or even 12 months’ rent upfront – something that landlords are wont to ask for when a prospective tenant doesn’t tick all the right boxes during the referencing process. A guarantor service can remove that financial hurdle, making the renting experience much easier for the tenant.
Another advantage is that tenants can obtain the guarantee before they find the property they want to rent. That way, they can proceed with the rental without any undue delays, as soon as they find the perfect home.
Using a rental guarantor service is an arrangement that delivers advantages to both parties – advantages that are particularly important given the current wider economic context.
