Lifetime deposits – what are the potential challenges and benefits for lettings?

Last November, as part of the Conservatives’ general election campaign, Boris Johnson made a surprise announcement that his party would introduce lifetime deposits for renters if it won the election.

In the event, Johnson went on to secure an 80-seat majority on December 12, providing him with the backing needed to push through new legislation a lot more smoothly.

The Queen's Speech on December 19 outlined the new government's plans, including lifetime deposits as part of the Renters' Reform Bill.

The Prime Minister has said that lifetime deposits would make it easier for tenants to move by reducing costs.

So, what is the government proposing and what are the potential benefits and challenges for letting agencies?

How will lifetime deposits work?

When announcing its proposals, the government said lifetime deposits would mean tenants won't have to save up for a new deposit while their money is tied up in an old one.

It has been suggested that the new system would allow tenants to hold a digital certificate with details of their security deposit. When they move, the certificate will be presented and then their existing landlord will be required to transfer the money to the new landlord.

The current system requires tenants moving between properties to pay a separate deposit to their new landlord. A criticism often levelled at this process is that tenants can hit affordability issues if they have to find the funds for a new deposit before their old one has been returned.

Meanwhile, there has been the rapid growth of zero deposit alternatives in recent years, which require renters to pay a non-refundable fee of around one week's rent to act as an insurance guarantee.

What are the challenges of a lifetime deposit?

There is no doubt that the idea of making renting more affordable for tenants is a noble one in principle and something which could encourage further long-term growth of the rental sector.

That said, there are some potential challenges to how this approach could work effectively in practice.

A key element will be what happens when damage deductions are required from a tenant’s deposit. Will the existing landlord need to pass on the full deposit before receiving the funds they require for repairs? Alternatively, will the new landlord receive a deposit lower than the value they agreed with the tenant and then receive the rest of the funds later?

There could also be challenges associated with integrating lifetime deposits with the existing tenancy deposit protection system. Will the transfer of funds between schemes be seamless and what happens if the existing landlord uses an insurance-backed scheme and the new landlord uses a custodial version?

Another consideration is how lifetime deposits will work in shared tenancies when one renter chooses to leave a contract.

It’s clear that any new framework designed to support tenants will need to offer protection to landlords, so they know their properties are safeguarded.

Could lifetime deposits benefit letting agencies?

If implemented effectively, lifetime deposits could have a positive impact on the lettings sector. In years gone by, the cost of moving between rental properties has been one of the biggest challenges for tenants.

A lifetime deposit - combined with the Tenant Fees Act introduced last year - will significantly lower moving barriers for tenants.

Cheaper moving costs could encourage more people to rent and stay in the sector for the long-term. This, in turn, could help to encourage landlords to remain in the sector and invest in more buy-to-let properties. These changes could stimulate long-term and sustainable growth in the private rented sector, which is good news for letting agencies.

What's more, the idea for a lifetime deposit to be implemented with a digital certificate can help to bring the deposit system into the modern age and hopefully speed up processes for agents and consumers.

What happens next?

The proposals for lifetime deposits are part of the wider Renters’ Reform Bill. There is currently no timeline for this Bill, although it has already passed its First Reading in the House of Commons.

Considering that it took almost three years for the Tenant Fees Act to become law after being proposed, it’s by no means certain that the Renter’s Reform Bill and lifetime deposits will be introduced anytime soon.

The industry will, however, be keeping a close eye on the proposals’ progress and any further details released over the coming months.

*Neil Cobbold is Chief Sales Officer at PayProp