The deposit dilemma
The cost-of-living crisis is likely to accelerate the move towards deposit-replacement schemes. Richard Reed looks at some of the options on offer.
If you’re locking up your money for two or three years you only get back what you put in, so in reality, with inflation, you are actually losing money having it sit there in an account. Gary Wright Co-CEO, Flatfair.
That’s the view of Gary Wright, co-CEO of Flatfair, which was set up in 2017 in an attempt to break the mould of the traditional model, which requires a prospective tenant to stump up five weeks’ rent as a deposit – in addition to their first month’s rent. Wright thinks it’s a big ask when the average rent is now around £1,300 per month. Add to that the fallout from Russia’s invasion of Ukraine, with the average family’s fuel bill set to rise to more than £3,000 a year, and you have all the makings of a rental crisis on your hands.
Inflation is a factor
“We’re a long way off the writing being on the wall for traditional deposits, but we are moving towards the realisation that tenants should be given that choice and not be forced down the cash route when money could be tight and money could be employed in more appropriate ways,” he says. “Obviously if you’re locking up your money for two or three years you only get back what you put in, so in reality with inflation you are actually losing money having it sit there in an account. So the differential is moving towards cash alternatives all the time.”
He believes there is a deep-rooted misconception that by offering a deposit alternative that the tenant isn’t potentially as good. “That’s been wrong from the start, and most alternative providers who’ve been around for five or six years know it’s wrong,” he states. “A tenant buying deposit alternative like ours are at least of the level if not a better standard of tenant than is often opting for a cash deposit.
“There are a lot of traditional old-fashioned landlords who have grown up taking cash and still think cash is king, but in reality it’s one of those myths we need to debunk.”
He points out that landlords don’t see where the money for a traditional deposit comes from. “Someone may have got it from beg borrowing or stealing behind the scenes, it doesn’t make them robust, it just means they’ve got access to money from somewhere”.
“Not having the money is not an indication that you are going to trash the property and not pay. In most cases we know tenants would have the money, they are just choosing not to use it. They can now use that £1,000 to buy the sofa they need, instead.”
Wright says industry’s challenge is making deposit alternatives available to everyone. “At the moment my focus is on the 85 per cent of tenants who do not get given that choice. That’s wrong, and in America it is now being mandated by state that they have to do that.”
Though not technically insurance (it holds its own pot of cash, which is reinsured), Flatfair protects up to 10 weeks’ worth of debt for a one-off fee equivalent to one week’s rent.
Lifetime deposits
Jamie Campbell, CEO of Fronted, agrees that the traditional deposit is becoming unaffordable. “Living costs are surging in the UK, putting more strain on people’s pockets, and increasing the chance of dipping into money they might have been saving for a rainy day,” he says. “If people can’t find the deposit, it might mean they put off moving and continue to live in a place they’re unhappy in. It might make it difficult to relocate – for example, for work – or force them into borrowing money from other sources and risk increasing financial pressure on them.”
Of the 11 million renters in the UK, more than half of those will not have savings, or help from friends or family, to front up a new deposit whilst they wait for their old deposit. Jamie Campbell CEO, Fronted.
Fronted offers what it calls a Lifetime Deposit that aims to solve the dilemma for tenants moving property of stumping up a new deposit before they get their old one back.
“We front up the deposit each time you move, and you have 90 days to pay it back when the old deposit is refunded,” explains Campbell.
“Of the 11 million renters in the UK, more than half of those will not have savings, or help from friends or family, to front up a new deposit whilst they wait for their old deposit. That’s a major stress for renters. It’s a great solution to save on the stress of moving and overcomes the challenges renters face of not having a pot of cash to front up themselves.”
Renters’ Reform Bill failing
Campbell says the Government has failed to tackle the issue in the White Paper on rental reform. “The whole sector believes in a solution to the issue of rental deposits, but the Government is not doing enough in supporting them solutions come to market. I launched Fronted as a solution to this problem, and we are on a mission to help renters overcome the challenge of securing a new rental home with an upfront deposit.” Fronted charges tenants a one-off fee of £49 and gives them 90 days to repay the deposit they have borrowed.
Over at Reposit, CEO Ben Grech claims to offer the cheapest price for tenants and – at eight weeks’ rent – the longest cover for landlords, together with generous commission for agents. “We are seeing some indications that purses are getting a bit more squeezed though it’s too early to really say whether that is really linked to the economic situation,” he says. “We are offering the most generous cover available on the market, and as we go into a time of recession and higher cost of living, it tends to be the rent arrears claims that are the large claims, and that we find is very compelling to landlords and agents. They can bundle it with other USPs and offer to landlords as an added benefit.”
We have a global insurance partner who backs up the cover on the Reposit product. The benefit of that for landlords is that the cover is absolutely watertight. Ben Grech CEO, Reposit.
He adds, “One really important aspect is how robust is the protection that landlords are getting. Reposit is an independently authorised firm and we have a global insurance partner who backs up the cover on the Reposit product. The benefit of that for landlords is that the cover is absolutely watertight.” He also refutes the idea that tenants using Reposit might be less creditworthy, pointing out that they all have to go through credit referencing or find a guarantor – or pay six months’ rent up front.
“Our view is that cash deposits are supposed to work for everyone, so Reposit should work for everyone as well.”
Reposit also offers what Grech describes as a “very slick” end-of-tenancy process which is automated on its platform and integrated with Goodlord, The Lettings Hub, Vouch, and other letting platforms.
Choice is important
Sam Reynolds, CEO at Zero Deposit, agrees with Gary Wright at Flatfair that in the end, it should come down to the tenant’s choice, rather than being dictated by landlords and agents. “For some, cash deposits will work – but not enough tenants are actually given the choice to switch,” he says. “If you look at the US market, deposit replacement is far more embedded in the rental experience – they are probably four or five years ahead of where we are.
It’s one reason why we’ve been able to make inroads with the landlord market, because you have all the protection and security of a fully regulated insurance product. Sam Reynolds CEO, Zero Deposit.
“You have to think that with the innovations we have seen over the past six months and further improvements that deposit replacement will continue to take a larger share of the market. But there will always be room for cash deposits because for some it is the better option. People should be free to choose the right option for them.
Level of appetite increasing for deposit alternatives
“What we have certainly seen is the level of appetite from landlords increase as they have become more comfortable with deposit alternatives.” He adds, “We’ve protected over £75m in deposit protection for landlords, so it is established within a segment of the market and it is becoming more attractive, particularly given concerns around consumer finances.”
Reynolds believes the traditional deposit is becoming increasingly unaffordable. “The reality is the majority of tenants struggle to find the deposit,” he notes. “Lloyds published research last month that suggests that on average, the rental audience only has £500 in their bank account as savings. In a world where you have one deposit locked up in a previous property and you have to find the deposit for a new property, it is really difficult for tenants to find deposits.”
He warns that, unlike Zero Deposit, not all deposit replacement schemes are regulated. “It’s one reason why we’ve been able to make inroads with the landlord market because you have all the protection and security of a fully regulated insurance product.
Welcome Ome
Insurance group Hamilton Fraser operates one of the three official government deposit protection schemes, My Deposits, though it has recently launched a new insurance-based product called Ome. CEO Eddie Hooker doesn’t believe the traditional deposit is going to go away any time soon.
‘If you could get rid of the deposit, the rental market would change overnight’ – that’s rubbish; the biggest problem is the level of rent and the scarcity of property. Eddie Hooker CEO, Mydeposits.
“The vast majority of landlords feel more comfortable with a cash deposit,” he states. “In London you’ve this massive demand for property and a massive supply issue, so a landlord is probably going to have 10-12 applicants all vying for his property and he’s going to go for the cash deposit. Tenants will naturally try to find that deposit.
“The only way they can guarantee that the tenant can afford the rent is if the tenant can stump up a five-week deposit and the first month’s rent. And I think a lot of landlords look at it that way, if you want the truth.”
He adds, “I don’t think the deposit is the problem, it’s the rent and the scarcity of property. Everyone focuses on if you could get rid of the deposit the rental market would change overnight. That’s rubbish; the biggest problem is the level of rent and the scarcity of property.”
However, Hooker does see deposit alternatives becoming a bigger player in the market, which is why Hamilton Fraser has launched Ome. “We wanted to offer choice,” he explains. “What we had an issue with was the up-front, non-refundable cost of the replacement.
“People offer an up-front premium and lasts for a year or two and then you have to pay another admin fee to renew it – it’s not linked to the length of the tenancy.
“We looked at it and thought a smaller monthly payment would be more affordable and more flexible.” Ome has a £30 set-up fee and tenants then pay £10 month per property, which offers five weeks’ protection for damages or unpaid rent to landlords. If for any reason the tenant stops paying the membership fee, the cover remains in place.
White label scheme
The model used by The Lettings Hub is slightly different to others in the market as it allows the agent to create their own branded scheme to offer to tenants, rather than tenants buying a deposit alternative directly from a third party. “It gives the letting agent greater control over the process and how much revenue they generate from the product, as the agent sets the charge the tenant pays, and direct control over the claims process,” said Heidi Shackell, CEO.
It gives the agent more control and means they immediately receive remuneration, rather than waiting to receive commission from a third party. Heidi Shackell CEO, The Lettings Hub.
The Lettings Hub’s deposit replacement product is administered via its pre-tenancy platform, BOX. Agents can choose to use it as a stand-alone product or make use of the full features of BOX, which include features such as property insurance and utility management. BOX is also fully integrated with Reposit so agents also have the choice of using its product instead.
The Lettings Hub is the only insurance-based product not to offer agents a commission directly, but because it is a white-label service, they can add their own fees and pass them on to the tenant. “It gives the agent more control and means they immediately receive remuneration, rather than waiting to receive commission from a third party,” Heidi Shackell added.
Physical deposit is best
The Deposit Protection Scheme (DPS) is an another of the three officially authorised deposit-holding schemes. Perhaps unsurprisingly, the DPS doesn’t believe deposits are becoming dated, and points out that over the past five years, the number of deposits it safeguards has increased by 30 per cent. Matt Trevett, CEO is quite clear of their value, today and into the future. “We strongly believe that a physical deposit, safeguarded by an independent third party, is by far the best way to ensure that landlords can have peace of mind over the condition of their property and their tenants’ responsibility towards it,” he said. “And tenants can be sure that, if they treat the place they live with respect and follow the tenancy agreement they’ve signed, that they will receive their money back in full when they move out.
We strongly believe that a physical deposit, safeguarded by an independent third party, is by far the best way to ensure that landlords can have peace of mind. Matt Trevett CEO, Deposit Protection Scheme.
“We think deposits of that size are a fair reflection of the risks that landlords take on when lending a property to someone else to live in – and of the responsibilities that tenants take on when they move in.”
The DPS currently safeguards more than 1.8 million deposits, and the organisation says that agents, landlords and tenants place particular value on its impartial, independent dispute resolution service run by experienced, qualified, legally-trained adjudicators.
Talks on transferring deposit
“Nevertheless, in the current economic climate we understand that saving for that first deposit in particular is likely to be more challenging,” said the spokesperson. “That’s why we’re speaking with other organisations to offer support in creating ‘deposit loans’ to their employees or members – as well as looking at introducing changes to our systems that allow a tenants’ deposit to ‘transfer’ to their next property.”
Many in the industry had hoped that the Government’s recently published White Paper, A fairer private rented sector, (aka Renters’ Reform Bill) would mandate giving tenants the right to choose between a traditional deposit and a deposit replacement scheme. However, no such proposal was included.
It may well be, however, that market forces will make the decision for landlords and agents. The cost-of-living crisis has yet to make its full impact, but when tenants start getting their winter fuel bills in six months’ time, the industry will get a dramatic wake-up call.
“As consumer finances deteriorate, which may mean that things like claims increase, it becomes a slight unknown if you’re not working with a regulated provider.”
Zero Deposit charges a £49 set-up fee at the point the tenant moves in, and then £17.50 each year thereafter. The company is also set to launch a new scheme Flex, that allows tenants to pay the cost of the guarantee fee monthly – reducing the up-front cost from 35 days’ rent with a cash deposit to as low as two days’ rent.
