Making deposits work for tenants

One reason the housing market is so stacked against renters is the high cost of taking our business elsewhere, so one of the ways we can make renters more powerful is to make moving house easier.

As our research site lettingfees.co.uk discovered, a typical household could save £404 when they move once the letting fees ban comes in. But a bigger cost - in the short term at least - is the damage deposit worth up to six weeks' rent.

We estimate that 86% of renters get most or all of their deposit back, but only after they've already moved into a new home, so achieving that involves raiding their savings, or borrowing money.

That's why today we're calling on the government to start allowing renters to transfer part of their deposit to a new home once they've paid the final month's rent.

Passporting deposits is one of the recommendations in our new report “Rethinking Tenancy Deposits”, co-written with Dr Mike Seiferling, a Lecturer in Public Finance at University College London.

The report, which draws on Freedom of Information figures and Generation Rent surveys, finds:

Tenants are losing out on more than £80m a year in interest on the £4bn of their money held as deposits, with only 2% receiving interest when they get their deposit back. This is despite government guidance for schemes to start distributing interest. As interest rates start to rise again, that injustice will only keep growing.
The average deposit held and insured by letting agents is worth £1240, 43% more than the £867 average deposit held in accredited protection schemes. This suggests that the insurance schemes allow tenants’ money to be treated as a cheap overdraft, and agents are taking advantage of it – 24% of tenancy agreements allocate interest on deposits to the agent.
New “zero-deposit” schemes, which charge a non-refundable insurance premium in lieu of the full deposit are, by and large, more expensive than simply borrowing the money for the deposit. They’re set up to make money from tenants, when tenants should be making money from the system.

The deposit protection system could be made fairer in the following ways:

The tenant – not the landlord – gets the account with the deposit protection scheme. They pay the money in and give the verification details to the new landlord. Voila, no more worries about whether your cash is protected!
Once the tenant has paid the final month’s rent (and appropriate notice has been given) the landlord notifies the scheme to release an equivalent amount of the deposit. Based on the average £1088, this could be worth £786 towards the new deposit.
Give tenants a return on their money – because it is held for as long as they’re a renter, the money should attract a relatively high rate of interest – e.g. 2.5% is what Barclays offers on its Help to Buy ISA. We estimate that the schemes would need a return of 0.45% to pay for administration and the dispute process.
Invest the money held in productive and socially beneficial activities. Because most of the cash will stay in the protection scheme, only a tiny amount – £57m we estimate – is needed on hand at any one time to distribute to tenants or landlords with valid damage claims. The vast majority could therefore be invested long-term, especially if the number of renters is only going to grow.
Invest the money in building new homes – we estimate that £4bn could build around 35,000 homes over five years.

The full report is available here.

The report covers only one side of the deposits system – many of us have tales of unfair deductions and how hard they are to challenge. Examining the shortcomings of the dispute and adjudication process would require a whole other report.

But one benefit of our proposed system is that passporting would reduce the amount a tenant would need to find in order to move. That would make them more likely to have enough financial resilience to feel confident to dispute landlord deductions and get more of their money back.