Moving house is expensive, with private renters paying on average £2300 upfront for a move. Yet two thirds of private renters have no savings at all, and many have to take on debt when moving. The Tenant Fees Act will make moving house more affordable and fair by banning fees to tenants and capping security deposits at 5 weeks when it comes into force on 1st June 2019. But it’s been a long wait for private renters from when the ban was first announced in 2016, while costs have risen in the meantime. Even after June, private renters will still need to come up with hundreds of pounds for a house move, whether it’s planned or not.
It’s in this costly context that deposit replacement products have emerged in recent years to ‚Äòdisrupt’ the market by offering tenants a way to reduce the upfront cost of moving whilst still offering the landlord protection against damages and rent arrears.
Sounds too good to be true, right?
The main thing to know about these schemes is that using one will cost you more in the long run than a traditional deposit. Even if you’re comfortable with that, you should carefully read the fine print of each scheme to make sure that they really are a good option for you. So, what’s the catch?
First of all, it’s important to note that there are growing numbers of these products on the market and they’re all really quite different. Some are decent options, but others – particularly which charge a monthly fee – seem downright exploitative. They all work slightly differently, with varying models, initial and ongoing costs, and end-of-tenancy liabilities. Unlike the official deposit protection schemes, which are licensed by government, there is no government oversight of these products. FCA regulation only applies to those schemes selling insurance to tenants, but few are insurance products even though they often look like they are. This makes it tricky for tenants (and landlords) to understand and compare the benefits and protections that they get from each scheme.
Generation Rent looked at a number of different “deposit-free” products on the market, comparing their models, dispute processes, and costs. We used a typical renting scenario, where a renter takes on a 12 month tenancy at £600pcm, which she renews but then leaves at the end of the second year. A traditional deposit protection scheme would be free to the tenant, but if she uses Zero Deposits she’d pay £164.46 in non-refundable costs over the two years, £166.15 with FlatFair, and a whopping £864 with Romans letting agent’s No Deposit Option. The landlord can still make claims of hundreds of pounds at the end of the tenancy.
Fundamentally, deposit replacement products are a cash-flow solution rather than an affordability solution. A traditional deposit should be cost-neutral, because you get the money you put in back if you don’t have rent arrears or any damages deductions at the end of your tenancy. But with a deposit replacement product you pay a non-refundable fee, usually set at one week’s rent (there may also be annual renewal costs), so even if you leave with no rent arrears or damage claims you’ll pay more in the long run.
For some people, this might be the price they need to pay, but you could certainly call this a poverty premium. A poverty premium is when people end up paying more for something vital if they don’t have the money for it when it’s needed, while those who do have the cash can buy upfront at a cheaper cost. So it’s pretty questionable whether these products are truly helping those renters most in need of help with moving costs.
The crucial part to check when considering a deposit replacement scheme is what happens at the end of the tenancy. What is the tenant’s liability for damages, and what does the dispute resolution process look like? Even though you’ve paid hundreds of pounds to the scheme, damages claims by the landlord could result in you paying out hundreds more at the end of the tenancy. True insurance schemes might just charge you an excess of the claim, but with most products you’re liable for full costs. You should check whether there is a transparent third party dispute resolution process to challenge any claims made by the landlord which you think are unfair, and whether there is a fee to do so. Most schemes charge a £100 – £120 ‚Äòarbitration fee’.
Another thing to remember is that for many of the products the letting agent is getting a commission for selling it to you. Some schemes are actively marketing themselves as a way for letting agents to recoup revenues that be will lost as a result of the incoming tenant fees ban. So how reliable really is your agent when they’re telling you that these products will save you money? We should note though that many letting agents and landlords are also very wary of these products, and foresee problems down the line. The Association of Residential Letting Agents (ARLA) doesn’t recommend that their members get involved with deposit replacement products. Not all landlords will accept them either.
Deposit replacement products are an unregulated wild west, and there’s been a steady stream of new ones popping up in the market. Some tenants find these products to be useful and that’s great. But if you’re considering one, do check our comparison table and read the small print of each product to understand your true costs and liabilities.
Since 2007 landlords taking deposits have legally had to protect tenants’ money in a government-licensed deposit protection scheme, and this system has helped reduce unfair deductions and protect tenants. That’s not to say that there aren’t problems with traditional deposits – certainly there are. We do need to reduce the upfront cost of deposits by passporting them between tenancies, or through more agents offering payment by instalment. We also need to standardise and improve inventories at the start of a tenancy and have a better dispute resolution process at the end. Generation Rent proposed a new deposit system last year, and we’re working with government, the schemes themselves, and others to these ends.
In the meantime, deposit replacement schemes offer a tempting opportunity to move house with lower upfront costs. But beware of drinking the deposit replacement Kool-aid; most simply mean tenants paying more in the long run, for less protection.
Have you used a deposit replacement product? Had a bad experience with one, or perhaps a really great one? Send us an email to tell us! [email protected].
Thanks to Alex Firth, who helped with this research.
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