Private renters in England and Wales are losing out on the potential benefits of £169m in interest on their money protected as deposits, Generation Rent research has found.
If the £5.37 billion in deposits protected by three government-accredited schemes in England and Wales were pooled and invested, it could generate significant returns, funding tenants to sue their landlord for unsafe homes, and reduce the upfront costs of moving by £817 on average.
Renters currently get just £17m of benefit per year from the existing funds held as deposits, but face huge barriers in raising a deposit in the first place. 16% of respondents to an Opinium survey commissioned by Generation Rent had had to borrow to cover the costs of their last move, and 29% had to use savings.
A new Renters’ Support Fund, advocated by Generation Rent, is modelled on a similar programme in Australia, and would involve consolidating deposit schemes into a single system run by one non-profit provider.
Throughout the UK, landlords are required to protect tenancy deposits in a government-accredited scheme. In England and Wales, landlords can choose whether to hold on to the cash and pay to insure the deposit (insurance-backed), or place the deposit with the scheme free of charge (custodial).
Currently, insurance-backed schemes, accounting for £2.9bn of deposits, complicate the deposit protection system, while allowing landlords to keep the interest that accrues on tenants’ money. Generation Rent recommends that the current insurance-backed deposit protection schemes should be discontinued, with all deposits protected custodially instead.
Generation Rent obtained figures on the deposit protection system through Freedom of Information requests to the Ministry of Housing, Communities and Local Government. At present only the 54% of tenants whose landlord chooses to use a custodial deposit scheme get interest on their money, and at low rates in the region of 0.7%, worth £17m per year based on the £2.4bn held in such schemes.
If all deposit funds, minus a small portion to pay out successful landlord claims, were invested in assets providing a return in line with the current Bank of England base rate of 4.25%, the annual income could be worth £226m per year. After deducting £40m to cover the administration costs of the schemes, this would leave annual funding to benefit private renters through:
- Legal support for tenants to bring provision back in line with pre-austerity levels. This would allow more tenants to sue their landlord for accommodation unfit to live in – £50.0m
- Passporting of deposits to reduce upfront costs of moving for renters without savings – £25.5m
- Deposit guarantee schemes for tenants in financial hardship and facing homelessness – £6.7m
This package would require an interest rate of 2.3% on the current value of deposits in England and Wales. Any surplus could be returned to tenants as interest on their money held in the scheme, though this would not be considered part of the deposit that the landlord had a claim on.
For those renters who currently cannot find a full deposit, it’s possible to pay ‘deposit alternatives’ (either a non-refundable one-off fee or regular fee on top of rent and instead of a full refundable deposit), but these are almost all unregulated.
Seven percent of respondents to the Opinium survey had used one of these schemes for their current tenancy. Half (51%) were in receipt of benefits, while 28% reported having a disability. In comparison, 39% of the overall sample were in receipt of benefits and 24% had a disability. This means that these groups are more likely to use a ‘deposit alternative’ and pay more overall for doing so.
‘Deposit alternatives’ represent a poverty premium whereby those with the fewest resources pay the most. The fact that these findings show that ‘deposit alternative’ products are being turned to by those who may be the most disadvantaged further reiterates the importance of their regulation.
Deposit ‘passporting’ would allow tenants to transfer deposits from one tenancy to another, reducing the average amount tenants must pay upfront when moving home by £817. While there would be an interim payment worth a week’s rent to use this system, most of it would be refunded once the original deposit is released by the scheme. Renters would still bear a small fee of £20, with the rest of the cost of the scheme covered by the fund’s income. This would mitigate the financial risk of deposit passporting that has meant it has not been delivered by the private sector before now. The fund would also provide a separate deposit guarantee scheme for renters in greater financial difficulty.
Passporting could release an estimated £694m per year of renters’ money, which would otherwise be tied up, reducing borrowing and financial stress while renters are moving.
The government is currently reviewing the deposit protection system in England and Wales ahead of renewal of the deposit schemes’ accreditation next year.
Dan Wilson-Craw, Deputy Chief Executive at Generation Rent, said:
“Renters face many disadvantages in the housing system. Around half lack savings, making moving home a more painful process than it should be. Limited access to legal support means it is hard to take action if your landlord is failing to keep your home safe.
“So it is a scandal that the billions of pounds of renters’ money tied up in deposit schemes is not being used to improve the experience of renting, and in many cases sees landlords and letting agents collecting the interest. With deposit schemes’ contracts up for renewal, the government has a golden opportunity to get renters’ money working for renters.”
Coverage
Read Short-changed: making deposit protection work for renters here.
Read The Mirror’s coverage of our report here.
