When renting a property out, letting agents and landlords recognise that it is important to take a deposit from the tenant and place it in a government-backed tenancy deposit scheme as protection to ensure that that any potential damage or unpaid rent at the end of the tenancy is covered.
But raising enough money for a deposit plus letting fees, which will continue to exist until the tenant fees ban is introduced in April 2019, can be a real challenge for many renters, who usually have to stump up the equivalent of a month’s or six weeks’ rent (soon to be capped at five weeks) as a deposit.
Given the financial pressure on renters under the existing deposit system, with tenants sometimes having to wait weeks to get their deposit returned or having a battle to get charges or financial deductions removed, and not always successfully as deposit disputes don’t always go their way, there is, perhaps unsurprisingly, growing appetite for deposit-free renting.
Deposit-free renting appeals
A recent YouGov survey found that 43% of renters would prefer to see tenant deposits scrapped and replaced with deposit protection insurance that pays for any damages to the property at the end of a tenancy, with tenants typically required to pay into the scheme through either a one-off payment, such as a week’s rent, or a monthly fee, and so is this something that more letting agents should be offering?
Tom Crosthwaite, head of sales at RentMyHome.co.uk, commented: “Nil deposit schemes are a helpful alternative to a traditional deposit as they provide protection for landlords at the same time as helping tenants who don’t have big reserves in place to pay a month's rent and six week's deposit up front.
“This is often a hindrance to tenants moving and so a nil deposit scheme means landlords don’t miss out on good tenants who just don't have large savings in place.”
Robert Colvile, director of the Centre for Policy Studies, is among those calling on the government to get behind an insurance-based model as an alternative to a rental deposit, in order to rectify what he views as “an unfair system which polling shows is unpopular with hard-pressed tenants”.
Support for tenants
Allowing tenants to acquire an insurance policy in lieu of a deposit should in theory reduce the financial pressures on renters.
“For too long, renters have had to face onerous requirements in terms of large deposits when they rent a new home,” said Rajesh Shah, managing director at Tipi. “It’s time that we take a fresh look at the need for deposits and help the UK’s renters free up that money and use it for other purposes.”
Shah’s views are shared by others, including anti-deposit campaigner Ajay Jagota, the founder of deposit replacement insurance scheme Dlighted, who believes the traditional deposit system is essentially inefficient in its existing form.
Jagota unsurprisingly wants to see more landlords and tenants use his company’s deposit-free renting solution that helps tenants to rent for zero deposit by using deposit replacement insurance to give landlords and letting agents up to £600,000 of protection against rent arrears, property damage and legal fees. However, tenants taking out the insurance policy are required to pay £129 annually for rents up to £2,500 a month.
He said: “Deposit replacement insurance gives landlords and letting agents significantly superior protection against rent arrears, property damage and legal costs while allowing them to let properties longer and faster.
“Deposit free renting makes renting cheaper for tenants, easier and more profitable for property professionals and cuts crime. The case for it is compelling.”
Several other schemes also exist, including the Zero Deposit initiative, headed up by Zoopla’s former commercial director Jon Notley.
Zero Deposit works differently to say Dlighted’s scheme in that it offers an insurance policy underwritten by Munich Re which the tenant acquires for a one off payment at the equivalent of one week’s rent, no matter the length of the tenancy, plus an annual admin fee of £26.
Notley said: “Zero Deposit has spent nearly two years working with property and insurance industry specialists to create a solution that addresses both the affordability problem for tenants whilst also designing a product that provides landlords with all of the protections of a cash deposit, and more.”
So far, there are about 650 letting agency branches offering Zero Deposit’s FCA-regulated deposit replacement product with more expected to go live in the coming weeks and months.
Under the terms of the scheme, tenants remain accountable for any damage or unpaid rents, with any disputes over claims by the landlord handled by the Tenancy Deposit Scheme (TDS), which has an exclusive partnership with Zero Deposit.
James Davies at Upad, one of the agents signed up to the Zero Deposit scheme, commented: “When a deposit on a previous rental property is yet to be returned, forking out another six weeks rent can be a barrier to entry for many renters. The insurance-based Zero Deposit option lessens that barrier and, therefore, makes the property appeal to a greater pool of potential tenants, thereby reducing the time it takes to let.”
Despite growing enthusiasm for deposit-free renting, not everybody is convinced of the merits of the insurance-based alternative to traditional tenant deposits.
Kris Kandiah, a letting negotiator at Benjamin Stevens, said: “I feel that a landlord would be less inclined to rent their property to someone who cannot afford to pay a security deposit and furthermore I can see that a landlord would be put off from a deposit replacement product. What would happen if the tenant wants to use their last month rent from the deposit and there are damages at the property when they leave?
“I can see the deposit replacement products working in a similar fashion to how councils used to use deposit bonds. They now don’t use this as much as landlords weren’t accepting their tenants and they now pay landlords incentives as they know the landlords want the money and not an insurance based deposit or deposit bond.
“It is a product that is aimed at the rental sector where applicants can’t afford a deposit but the real question to ask is if they are unable to afford a deposit, can they be trusted to afford the rent and can it be paid in time.”
Whilst appreciating the need for choice in the industry, including deposit replacement products, the Deposit Protection Service (DPS) firmly believe that cash deposits still provide the best form of security for both landlords and tenants.
A spokesperson at the DPS said: “Cash deposits ensure that tenants are financially no worse off at the end of a tenancy than they are at the beginning, as long as the terms of the tenancy are adhered to.
“We are not convinced that the alternative schemes currently on the market will help reduce financial pressures on renters or offer greater security to landlords. Whilst these schemes may seem attractive to tenants from an initial cost perspective, tenants may find that they actually incur higher costs by the end of a tenancy.”
Could tenants lose out?
Dan Wilson Craw, director of Generation Rent, pointed out that tenants who opt for the insurance scheme but do not make a claim at the end of a tenancy will effectively lose any money paid to the insurer.
He said: “The tenancy deposit is a significant sum of money to find before you can move into a new home, and the system sorely needs to be made more affordable.
“Unfortunately proposals to replace it with an insurance policy will make participating tenants worse off, because they get nothing back when they move out.
“Even if you borrowed the money for a deposit and paid it off over a few months, the interest involved would still be less than the premium you’d pay for deposit replacement insurance.”
The chief executive officer of mydeposits, Eddie Hooker, is an arch sceptic of no deposit insurance alternatives, as he also does not believe that they offer any greater protection for tenants.
He said: “If you look beneath the surface at the drivers behind the people who are promoting the no deposit insurance alternatives, you will see that these schemes are not being driven by a desire to create better affordability for tenants but rather by agents looking to compensate for the impact of the tenant fee ban next year.
“Opportunistic agents recognise that they can earn substantial commissions by selling these insurance schemes, with up to 30% of the upfront fee available.”
Hooker claims that he has even heard of some agents charging more in rent – up to £40 a month extra in order to drive up the cost of the insurance product.
“Agents talk about helping the hard up tenant, but these schemes are designed to ensure that fat cat agents, most notably the big chains, earn more money.
Hooker says that he has some pertinent questions that he has not been able to find clear answers to in order to offer him the “same comfort that the traditional deposit provides to the landlord and the tenant”.
He asked: “How many no deposit insurance products have been sold? How many tenants have lost money? How many tenants have had their claims handled by qualified adjudicators? How many tenants have been referred to debt collectors after losing their claim?”
“What many people don’t understand is that deposits are refundable if the tenant abides by the terms of the tenancy agreement. Insurance premiums are not,” he added.
With a growing number of agents signing up nil-deposit schemes, they are rapidly becoming more commonplace, which is ultimately welcome news for many renters given that research shows that they unequivocally want choices.
If your firm is contemplating the idea of offering deposit protection insurance, it is important to note that the products on offer differ and generally do not offer consumers the same features and benefits, and so it is important to assess the different options available and so due diligence is a must before entering into any agreement.
“For those that take the time to dig a little deeper, you will see that not all of these products are the same and I do have concerns that the public might think otherwise, so it is important that each is assessed on an individual basis,” said Simon Gerrard, MD, Martyn Gerrard Estate Agents, which currently offers Let Alliance’s Nil-Deposit product.
Although not suited to everyone, the fact is that deposit replacement insurance schemes, which already provide some agents with an additional revenue stream, are growing increasingly popular. But it remains to be seen if deposit-free renting will become the norm.
*Marc Da Silva is Estate Agent Today and Letting Agent Today Features Editor and Editor of Landlord Today. You can follow him on Twitter @propertyjourno