The Thorny Issue of Personal Guarantees in Buy to Let Mortgages

It’s a tough time to be a professional landlord so it makes sense to look at the options available to limit the risks and create more confidence around investment decisions.  Personal Guarantee Insurance has become one such option as landlords focus on the long term and continue to invest in their portfolios. As a property investment expert in FT Adviser said recently: “When entering property investment, a long-term perspective is indispensable. Two, three, or even five-year horizons can be too short-sighted.”

However, there is no hiding from the fact that according to UK Finance there has been a 41% increase in buy-to-let mortgage arrears and a 7% growth in buy-to-let mortgaged properties taken into possession.  There is little doubt that the struggle is real for the professional landlord.  As interest rates keep rising in an attempt to cool inflation, progressively rental payments are not covering loan repayments and costs, meaning that some professional landlords who have signed personal guarantees as a condition of the mortgage could be left wondering if their own home is at risk.  

Personal guarantee insurance for professional landlords

Help is at hand though in the form of the U.K.’s first ever personal guarantee insurance for professional landlords, from Purbeck Personal Guarantee Insurance.  We are experts in protecting small business owners from the risks of personal guarantees.   

In response to a growing demand from landlords in the residential buy-to-let sector, Purbeck has now launched personal guarantee insurance (PGI) specifically for professional landlords applying for buy-to-let mortgages in a limited company status.

This innovative insurance product will cover 80% of an outstanding mortgage if repayments fall into arrears and the mortgage lender seeks to take action to recover the property. Insurance premiums are also very affordable making this protection attainable for professional landlords looking to expand their portfolios without risk to their personal assets.

As PGI experts, Purbeck has already protected over 2000 small business directors from the risk of personal guarantee backed business loans and consistently achieves a Trustpilot score of 4.8 with 93% of customers rating our service as ‘excellent’.

The growth of the professional landlord

In an arena where landlords are coming under increasing financial pressure, more are choosing to acquire properties using a buy-to-let mortgage in a limited company status, for the significant tax advantages.  Indeed around 40% of buy-to-let mortgages are now in a limited company structure and this is expected to grow based on research by the banking sector.  However, as any landlord who has secured a limited company buy-to-let mortgage will know, these financial arrangements can also pose a serious financial risk as professional landlords are generally asked to sign a personal guarantee as a condition of the mortgage.  The mortgage lender is then provided with direct recourse to the professional landlord’s personal estate should the landlord fall into arrears and there is a shortfall following property repossession by the bank.

Landlords will no doubt be alarmed by reports of the return of negative equity. The National Institute of Economic and Social Research has suggested that the sharp drop in house prices this August 2023 has resulted in 50,000 falling into situation over the last 12 months.  This follows news that house prices were falling at the fastest rate in 14 years.

Already, landlords have seen incomes being eroded by rising costs so the nightmare of losing their own homes could become a genuine concern for professional landlords.  To add to this challenge, mortgage lenders are now asking for a bigger part of the mortgage as security in the form of a personal guarantee. In fact, based our analysis, last year, buy-to-let landlords were typically asked to sign personal guarantees to the tune of £509,000 as a condition of a limited company buy-to-let mortgage, a big jump from £328,000 in 2021.

The statistics seem to concur that landlords are under the cosh and sadly, some are being pressured to sell their properties. Official figures from HM Revenue and Customs – based on capital gains tax data – suggested that landlords sold 153,000 properties in 2021-22. This is 8.5% more than originally estimated. 

No-one is doubting the rental market is tough for tenants too, with rental prices paid in the UK rising by 4.9% in the last year but set against such a turbulent economic background of property values falling, increasing mortgage payments, stricter regulation and snowballing maintenance costs, these rises seem inevitable.  So it does beg the question, what more can the professional landlord do to protect their own estate and help stop the demise of the buy-to-let market, which would surely push rental prices up still further?

The launch of a new insurance solution to protect professional landlords from the risks of signing personal guarantees could not be better timed.

The first personal guarantee insurance protection for professional landlords

Purbeck Professional Landlord PGI, will cover 80% of an outstanding mortgage if repayments fall into arrears and the lender seeks to take action to recover the property.  As rising costs force nervous landlords out of the market, the knowledge that their personal estate can be protected, may help to keep them and their properties in the buy-to-let game.

With the aforementioned growth in buy to let mortgage arrears and possessions causing stress and anxiety, landlords who choose to take out personal guarantee insurance can also benefit from Purbeck’s Support Desk if they begin to face financial distress. With the solitary nature of the landlord profession, sharing problems can help reduce the burden and when a Professional Landlord is facing financial distress it gives access to expert financial advice, specialist consultancies and mentoring support to help prevent repossession of a property.

Reaching out to professional experts

This is certainly a tricky period for professional buy to let landlords and as many face the pain of fixed rate mortgage deals ending and the prospect of re-mortgaging is on the cards, it is more vital than ever that landlords seek professional advice. FIBA accredited brokers, for example, give guidance on limited company buy-to-let mortgages, but can also provide advice on understanding the risks of signing a personal guarantee and how to take steps to reduce that risk.  Personal Guarantee Insurance is just one proven way of doing so, but there are other measures too, like sharing the guarantee with co-directors in the business. 

With skyrocketing mortgage rates and the threat of an increased burden of more stringent Energy Performance Certificate requirements looming, buy-to-let professional landlords have a lot of moving parts to consider.  Short of a crystal ball, some might find themselves sitting on the fence at this point in time, trying to decide whether to carry on in an uncertain climate.  One thing is certain though, by securing Purbeck Professional Landlord Personal Guarantee Insurance, a Landlord’s personal finances can now be protected as they navigate short-term market fluctuations and perhaps heed advice to take a longer-term view short-term market fluctuations and perhaps heed advice to take a longer-term view.

Todd Davison, MD of Purbeck Personal Guarantee Insurance