Fears over winter rent arrears crisis as energy costs soar

The soaring cost of energy is causing hardship for many families, and is only set to get worse. Landlords need to keep communicating with tenants – and ensure their rents are protected.

Landlords face a “perfect storm” from potential rent defaults and rising mortgage interest rates this winter, as energy prices soar.

Leading insurers say they are already seeing a growing number of rent defaults as families struggle to cope with the rapidly rising energy price cap.

New forecasts for the January price cap from Cornwall Insight have risen by more than £650, meaning a typical household is now predicted to pay the equivalent of £4,266 a year for the three months to March 2023.

Forecasts for the October cap have also seen a rise, going up by over £200, with predictions for an average bill now sitting at £3,582.

Insurers warn the massive surge in prices will leave landlords vulnerable, with many tenants simply unable to meet all their commitments.

Private landlords who don’t use a letting agent – just over half (52%) according to the English Private Landlord Survey 2018 – are particularly at risk, as they are statistically less likely to have rent guarantee insurance in place.

‘Massive problems’

“We’re on the front line in terms of insurance premiums and the evictions side of it, (we) are seeing massive problems with it,” says Eddie Hooker, CEO of Hamilton Fraser, which offers general landlord insurance.

“My view is that tenants are going to be having some very, very difficult decisions to make come October onwards – are they going to heat their properties, are they going to eat – especially the vulnerable, especially families.

“There is no silver bullet here. Ultimately, when these bills hit, there are going to be hard choices.”

Hooker predicts that evictions will probably go up to between 150,000 and 170,000 over the next 12 months across the UK, from 80,000 at the moment.

He says Hamilton Fraser has seen inquiries from landlords about evictions rise to 15 a day from six or seven a day 12 months ago.

Hooker’s warnings are echoed by Andy Halstead, CEO of rent-guarantee provider Let Alliance, and he pulls no punches.

‘We’ve never faced anything like this’

“Is it a risk? Definitely. What are people going to do if they don’t have enough money?” he says. “I’ve been running rent guarantee books for the best part of 20 years, and whatever the economic cycle we get through it and always have, but we’ve never really been faced with anything quite like this.

“Do I think we’re heading for increased rent arrears? Definitely. No doubt about it. We’ve seen rent guarantee claims increase this year already by 15%. It’s starting to feed through.”

He says if families don’t have enough money to pay their bills, they are faced with a bleak choice.

“You can imagine, you are sat there on pay day saying, ‘We don’t have enough money’. You then have to pick what you pay and what you don’t pay. What choice do you have? This isn’t about people not meeting their responsibilities, it’s about an impossible scenario.

“The average family is going to suffer like mad, let’s be honest about it. This is really ugly.”

Halstead believes there are no easy answers, but does offer a crumb of comfort by saying that rent payments are usually the last bill that tenants will stop paying.

“What I can tell you from years of experience and analysis of claims, when rent isn’t paid it is usually the last thing to go wrong. So what people have usually done by the time they don’t pay the rent is they have exhausted all other avenues – they will be in arrears with credit, loans, cards, HP. Why? Because they lose their home if they don’t pay the rent.

“Rent arrears are a very good barometer of the state of what’s going on out there. If and when rent arrears start rising, what it’s telling you is there is a serious crisis across the population.”

Communication is key

Hooker says good communication is key to help pre-empt any potential rent default.

“Go and talk to your tenant – don’t wait for it to happen,” advises Hooker.

“My advice is to continue with the Covid approach, which is keep talking to the tenant. That’s the key to it, because if the tenant has stopped paying you need to know why they have stopped paying.

“A tenant will only do that if they don’t feel they have got any other avenue to go down, and one of the avenues has to be the landlord. They must talk to the landlord, and if they don’t, the landlord must be reaching out, otherwise the landlord will become the criminal and we don’t want that. There’s enough rhetoric out there demonising landlords. There’s no quick fix for that other than talking and communicating.”

Hamilton Fraser also offers a mediation facility for landlords and tenants through the Property Redress scheme, with an initial fee of just £25, to help deal with rent arrears before the situation becomes too severe.

“We are happy to pick the phone up and try to mediate some form of solution with the tenant.”

‘Don’t be tempted to put the rent up’

Hooker has another piece of advice for landlords facing what he calls a “perfect storm” of rent defaults and rising mortgage interest rates – don’t be tempted to increase rents.

“We are starting to see landlords putting the rent up; they want the same yield,” he says. “If they are coming out of a fix on a mortgage they are probably likely to see a threefold increase in the interest rate, and therefore their yield will drop, and so they will be tempted to put the rent up – and obviously there is a lot of demand out there, because a lot of landlords have been tempted to exit the market.

“I think landlords would be better to look at the long term and not be tempted to suddenly whack the rent up, which would exacerbate the problem for the tenant, causing arrears.”

Landlords with HMOs where energy costs are included in the rent may have little option, however, or they will find their rental income swallowed up by energy bills. The good news is that the whole of the rent, including the utilities element, is usually covered by guarantee policies.

Ellie Wiles, marketing and partnerships coordinator at Vouch, echoes Hooker on the importance of talking to tenants at the first sign of trouble.

“When they are getting into this situation, at the very start, talk to them to understand what’s going on so you can help them, rather than have a big fall out when they stop paying their rent,” she advises.

“Communication is key – it’s the first thing you want to do before falling out with each other.”

Rent guarantee insurance is vital

Vouch provides a variety of resources for landlords on how best to communicate with the tenant, such as how to have that initial conversation, and how to set up payment plans, rent holidays or rent reductions.

“We’re just encouraging people to get insured now, so if the worst does happen to them during the winter, they’ve got that support to fall back on,” adds Wiles.

“At the moment we are waiting to see what happens. Energy prices are due to go up in the winter a crazy amount but we can’t predict what’s going to happen, so we are just making sure we’ve got the best product for landlords, in terms of support, at a price that’s affordable to them.”

Halstead believes it’s vital for landlords to have some form of rent guarantee insurance in place in the current economic climate.

“If properties are not protected by rent guarantee now, landlords are seriously vulnerable,” he warns.

“It’s not just about the arrears, it’s also the legal costs. What happens when we get into this kind of crisis is people fight to stay in their property and come up with all kinds of reasons why they shouldn’t pay the rent, and our rent guarantee covers all those kinds of situations while at the same time paying the rent.”

No plans to increase premiums

Halstead says his company has deep pockets and has no plans to increase premiums in the foreseeable future.

“It would be the last thing that we do because I think it’s on us to ride out the tough times,” he states.

But he underlines that soaring energy prices pose a serious threat to the industry.

“Will it upset the private rental sector? Definitely. Are we going to find ourselves going through a tough time? Definitely. Make sure you’ve got a partner with the financial resources to get through it.”

Meanwhile Cornwall Insight, which compiled the shock figures on the predicted price cap, is urging the government to take action to support families this winter.

“While our price cap forecasts have been steadily rising since the summer 2022 cap was set in April, an increase of over £650 in the January predictions comes as a fresh shock,” says Dr Craig Lowrey, Cornwall’s principal consultant.

“The cost-of-living crisis was already top of the news agenda as more and more people face fuel poverty, this will only compound the concerns.

“It is essential that the government use our predictions to spur on a review of the support package being offered to consumers. If the £400 was not enough to make a dent in the impact of our previous forecast, it most certainly is not enough now.”

Lowrey says the government must make introducing more support over the first two quarters of 2023 a “number one priority”.

“In the longer-term, a social tariff or other support mechanism to target support at the most vulnerable in society are options that we at Cornwall Insight have proposed previously. Right now, the current price cap is not working for consumers, suppliers, or the economy.”

Photo credit: Couple at home photo created by wayhomestudio – www.freepik.com

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