The Government is exploring alternatives to tenancy deposits as it looks to make renting more affordable for tenants.
A Ministry of Housing, Communities & Local Government report has found that deposits have become larger than they need to be to protect landlords, and prevent some tenants from moving or even entering the private rental sector.
The average tenancy deposit in the UK is now £1,161 – an increase of 18.6 per cent over five years. On top of this, tenants often have to pay a new deposit when moving before they get their old one back.
The average tenancy deposit has increased 18.6 per cent over five years, now standing at £1,161
But a Government study, launched alongside a Bill which will result in a complete ban on letting fees, could shed light on the viability of the alternative options available to tenants.
According to The Tenancy Deposit Scheme, in March 2016 there were 3.4million tenancy deposits in the UK.
Ajay Jagota, founder of deposit-free renting firm Dlighted, said: ‘We’re talking about a system which sucks £4.2billion from our economy, makes renting unaffordable and costs landlords tenants without adequately protecting them against rent arrears and property damage.
‘Intervention is needed to address these market failures, and it could be here by the end of the year.’
The results of the study will be shared in six months’ time.
What other options are available already?
There are currently a few alternatives on the market to tenancy deposits.
Zoopla-backed Zero Deposit allows tenants to buy an insurance policy for the equivalent of one weeks’ rent which protects their landlord for up to six weeks’ rent.
The difference between this and a normal deposit is that the renter doesn’t get the money back at the end of the tenancy. Renters remain responsible for any financial loss or damage due to the landlord, as they would with a traditional tenancy deposit.
At the end of the tenancy, any claims found to be in the landlord’s favour are paid to the landlord by Zero Deposit who then seek reimbursement from the tenant. If the tenant doesn’t pay, the matter is handed to a debt collection agency.
To qualify for Zero Deposit tenants need to pass new tenant checks and be renting a property with a standard Assured Shorthold Tenancy agreement.
Zero Deposit is not available on all properties and are offered subject to the landlord’s approval.
A company called Reposit provides a similar service, in that it allows tenants to pay the equivalent of one weeks’ rent, which is non-refundable, and protects the landlord for damage and loss worth six weeks’ rent.
Tenants are still liable for any damages and they still have to pay any costs at the end of the tenancy, like they would with a deposit. If the tenant leaves the property with no outstanding charges against them they get a discount on their next policy.
Jude Greer, co-founder of Reposit, welcomed the Government’s study: ‘It is great to see the Government considering alternative solutions to rental deposits,’ she said.
‘The industry presumes that because everyone is paying their deposits that there isn’t a problem but the reality is they are in debt before their second rental payment.
Many schemes allow tenants to pay a non-refundable fee equivalent to one weeks’ rent in lieu of a traditional deposit
‘We would hope to see the Government advocating products like Reposit, which does provide the innovation needed and is engineered to make renting more affordable.’
With a service called Flatfair, tenants pay a weeks’ worth of rent, which covers the landlord for 12 weeks’ rent, rather than the typical six weeks’ worth.
Flatfair claims to be the fastest growing deposit alternative in the UK, having just signed a deal with the UK’s largest independent estate agency Spicerhaart.
Franz Doerr, founder of Flatfair, said: ‘The UK residential lettings model is broken.
‘Agents and landlords focus primarily on getting the tenant into the house quickly at the beginning of the tenancy but then seem to care less about the tenant when moving out.
‘We, therefore, welcome the Government encouraging innovation in the deposit space, which we believe is long overdue.’
Not all landlords are on board with these schemes and they may not be available to all tenants, who are subject to background checks on application.
Doerr explained: ‘If a landlord or agent is not yet on board, we offer tenants to introduce us to them so we can take it from there. It’s important that landlords give their consent.’
There is also Dlighted, an insurance intermediary which protects the landlord against unpaid rent or tenant damage. The renters are then liable for the costs of a successful claim made against them at the end of their tenancy.
What separates this from other schemes is that it is the landlord paying the premium, not the tenant.
Are they a realistic or desirable option?
Some observers are unconvinced that the deposit-free services available are a better solution than what is already on offer with a traditional tenancy deposit, however.
Dan Wilson Craw, director of campaign group Generation Rent, said that while such products may be attractive, there is a danger that tenants may end up worse off.
‘If you pay a deposit, and you meet all your obligations as a tenant, you will get it back when you move,’ he said.
The Government is proposing a complete ban on agent letting fees
‘With these schemes, you pay £200 that you’ll never see again. For most tenants, it would be cheaper to borrow the money for a conventional deposit and pay it off over a few months than pay for a non-refundable insurance premium.
SHOULD DEPOSITS BE PASSPORTED BETWEEN PROPERTIES?
Gillian Guy, chief executive of Citizens Advice, believes that Government should explore whether tenants should have the option to carry their deposits over to new properties.
She said: ‘Finding a new deposit worth six weeks’ rent before the old one has been returned causes big money worries for tenants renting privately.
‘To help fix this, the government should amend the Tenant Fees Bill to cap deposits at the equivalent of four weeks’ rent.
‘It should also consider introducing measures to allow deposits to move automatically to the new property, and prevent the need for “double deposits”.’
‘We could reform the system so that deposits could be passported between tenancies, and for the money to earn tenants a return while it is locked away.’
The schemes may be beneficial for landlords and managing agents, however. Reposit report that 17 per cent of Reposit tenancies end with some form of a charge to the tenant, which is lower than the 30 percent of traditional deposits that have some form of deduction.
But Richard Lambert, chief executive at the National Landlords Association, also has his doubts.
‘Tenancy Deposit Protection has been around now for more than 10 years, and in the vast majority of cases the tenant’s deposit is returned without any deductions,’ he said.
‘This means that while a smaller, one-off payment may seem like a more cost-effective up-front expense for tenants, it could prove costly in the long-run for the majority who meet their obligations during the tenancy and would otherwise have been entitled to receive their deposit back in full.
‘Above all, deposit protection is well understood by landlords and a viable alternative has yet to be proven.’
Ban on letting fees
The main proposal of the Government’s Tenant Fees Bill is a complete ban on agent letting fees.
Letting agents charge an assortment of different fees to tenants, ranging from reference check fees to charges on the over-payment of rent. These would all be banned under the new proposals.
According to comparison site Letting Fees UK, as of April 2016 a two-person household paid an average £386 in letting fees, with fees charged ranging from £40 to up to £780.
The Government predicts that the Bill will cost landlords £83million, or £31 a landlord in the first year of implementation. It could also cost letting agents £157million and even lead to closures and employment losses.
Renters can expect to see a benefit of £240m over the next two years. However, landlords have warned that the measures may lead to tenants paying higher rent.
The Tenant Fees Bill also includes proposals to cap the amount that can be charged for a change to tenancy at £50, unless the landlord demonstrates that greater costs were incurred.
Alongside rent and deposits, agents and landlords will only be permitted to charge tenants fees associated with a change of a tenancy when requested by the tenant, as well as utilities, communication services and Council Tax, and payments arising from a default by the tenant, such as replacing a lost key.
A government consultation found that 58 per cent of the 4,700 respondents and 93 per cent of tenants agreed with the Government’s proposed approach to ban letting fees to tenants.
The measures were first announced in Chancellor Philip Hammond’s 2016 Autumn Statement. The government has indicated that the new rules will not come into force until Spring next year.