The writing could be on the wall for traditional rental deposits, as deposit replacement schemes make big inroads into the market.
The surge in popularity comes as rents increase to ever higher levels – up 2.7 per cent in December on 2019, according to HomeLet – with more and more renters struggling to find a deposit.
For those moving flat, it can be a double whammy, having to find two months’ rent due to delays in getting the deposit back from their existing rental – which can take up to eight weeks in the event of a dispute.
For those moving flat, it can be a double whammy, having to find two months’ rent due to delays in getting the deposit back from their existing rental.
No-deposit schemes seem to be a win-win solution: tenants only have to find one week’s rent, as a fee; while letting agents benefit from commission of up to 20 per cent on the new schemes – which are usually based on an insurance model.
Meanwhile landlords are being offered up to eight weeks’ rent in the event of default, far more than with traditional deposits – which were capped by law at five weeks in 2019.
Since the first deposit alternative offering, Reposit, launched five years ago, the number of providers has increased dramatically, and they have made steady inroads into the business of the three main traditional deposit holders – TDS, DPS and MyDeposits.
The new norm?
“We believe that this will become the norm within five years,” says Reposit CEO Ben Grech. “Look at the example of the USA – some states are now mandating that a deposit alternative option is offered to tenants. That is very sensible, especially when considering the issues around affordability of housing.”
He claims roughly 30 per cent of tenants are choosing Reposit over a traditional deposit scheme, offered the choice, rising to 50 per cent with some letting agents – perhaps hardly surprising, given that 43 per cent of tenants need to fund a deposit through borrowing, according to the firm’s research.
We believe this will be the norm within five years – look at the example of the USA – some states are now mandating that a deposit alternative option is offered to tenants. Ben Grech CEO, Reposit.
There is also a big bonus for agents and landlords – properties advertised with a deposit-free option have been shown to get 26 per cent more click-throughs online, according to Grech. “This demand boost helps landlords and agents to let properties faster and reduce void periods,” he says.
He also points out that providers under the existing deposit protection schemes can make considerable sums of money from interest on the cash they hold, while tenants get nothing other than their money back at the end of the rental. Reposit offers eight weeks’ worth of rent cover for landlords while commission for agents is typically 10-15 per cent.
Deposits fall for first time
Simon Scott, director of no-deposit scheme Flatfair, one of the few which is not insurance based, says business has been growing up to 15 per cent per month for some time. He points to research showing that traditional deposits fell for the first time in 2020 – though he accepts teh Covid pandemic will have had an impact on that.
The burden of proof is firmly laid on the tenant to disprove it rather than the landlord to prove it with a cash deposit, and switching that around is fundamentally important. Simon Scott, Flatfair.
“I think fundamentally taking a cash deposit is broken in many ways; it doesn’t really suit any of the parties,” he says.
“We have a higher percentage of tenants leave without charges being levied of any kind. There is an attitude around traditional deposits [of] ‘I’ve got some of their money’ rather than releasing it because things seem OK.
“The burden of proof is firmly laid on the tenant to disprove it rather than the landlord to prove it with a cash deposit, and switching that around is fundamentally important because 99% of tenants go through their tenancies behaving in a good way, and there are perhaps times when charges are laid on them that don’t need to be.
“Deposit alternatives really do level the playing field and shift the burden of proof in the right manner, in my book.”
Flatfair offers six weeks of rent cover, though damage cover can be extended by a further six weeks. Commission offered to agents on sales, varies.
Agents invest in new players
Another new market player, Zero Deposit, has seen several big estate agencies investing in the business, including names such as Countrywide, Connells, LSL, Foxtons, Acorn and Knight Frank. Perhaps tellingly, another investor is traditional deposit holder TDS.
“We work with many of the industry’s largest agents and we are fortunate to count a number of them as investors in the business,” says CEO Sam Reynolds. “One of the advantages of our scheme is the amount of scale we’ve been able to achieve in a relatively short space of time.”
He points out that February was the firm’s best-ever month, and that their research shows that the number of online searches for deposit replacement products is constantly increasing.
From what we see in terms of consumer intent to purchase this product, deposit replacement is only going to keep growing… renting is easier, faster and fairer. Sam Reynolds CEO, Zero Deposit.
“Before the impact of Covid we were seeing steady growth in terms of guarantees sold and revenue,” he says. “From what we see in terms of consumer intent to purchase this product, deposit replacement is only going to keep growing.”
He says the company’s mission is to make renting “easier, faster and fairer”, and that one of the issues they set out to address was the problem facing tenants of having to find a second deposit, temporarily, if they want to move flat.
He says their research shows this is a financially challenging period of time for any tenant, whether they are on their first property, or third or fourth or fifth.
Getting on property ladder
Deposit replacement schemes could also help renters get on the property ladder more easily – saving to buy was one of the main reasons given to researchers as to what the money was used for.
As a regulated business, Reynolds says the company provides protection for tenants, landlords and agents, “that not every deposit replacement provider is able to do”.
“There are protections in place as part of our regulatory commitment,” he says. “We invest heavily in processes so tenants are fully aware of their obligations when they purchase a guarantee.” Zero Deposit offers six weeks of rent cover; commission varies.
Let Alliance, one of the leading insurance and referencing providers, has set up Nil Deposit, which offers the highest rate of commission to brokers at 20 per cent – though agents also have to use the company’s full referencing service to qualify.
“That gives us the confidence that tenants have the appropriate profile and means to become a member of our replacement deposit scheme,” says Andy Halstead, founder of Let Alliance and now CEO of the merged HomeLet and Let Alliance.
With some schemes the tenant is buying insurance but they are not insured themselves, the landlord is – they still have to pay out if there is any damage, but not with our scheme. Andy Halstead CEO, Let Alliance.
However, he admits the new schemes are not for everyone. “If you intend on being a good tenant you don’t get anything back via a replacement deposit scheme,” he says. “The reason they do it is for cashflow. If I asked 100 people who work for us in Let Alliance, ‘Would you pay a month’s deposit or would you pay one week’s deposit for membership knowing you will never get a penny of that back?’, 80 per cent would pay for one week.”
The firm also requires tenants using Nil Deposit to take out liability insurance to cover any damage they may cause. It can be bought as a standalone policy or as part of a contents insurance package.
“With some schemes the tenant is buying insurance but they are not insured themselves, the landlord is – they still have to pay out if there is any damage, but not with our scheme,” he explains.
Nil Deposit offers six weeks of rent cover; commission is 20 per cent.
New developments in the no-deposit players’ armoury include a deposit cashback offering from Reposit, which allows tenants who have already paid a cash deposit to get their money back and purchase a Reposit product instead.
Meanwhile Let Alliance is also looking at offering a lifetime deposit product at some point in the future.
However, traditional deposit holders are fighting back.
Traditional deposit holders are fighting back – Hamilton Fraser, which runs Mydeposits – one of the ‘big three’ providers – has launched its own deposit replacement product.
Hamilton Fraser, which runs Mydeposits – one of the ‘big three’ providers – has launched its own deposit replacement product, Ome, as a “complementary alternative” to the existing scheme.
“Many landlords and agents prefer not having to worry about looking after someone else’s money and the risks that come with non-compliance,” says Ome co-founder Matthew Hooker.
“We see deposit replacements making great strides over the next few years. Our survey of the private rented sector in December 2020 shows that more than 30 per cent of respondents (landlords, agents and tenants) are already interested in using deposits replacements, so it is only a matter of time before they become a mainstream option.
Many landlords and agents prefer not having to worry about looking after someone else’s money and the risks that come with non-compliance. Matthew Hooker Co-founder, Ome.
“We wouldn’t go so far as to say they are the future, rather a significant and growing part of it. Deposit replacements are ultimately about choice and flexibility, but for many tenants a traditional cash deposit works perfectly fine for their lifestyle.”
Ome bucks the trend with the new breed of no-deposit schemes by not charging any up-front fee, operating instead via a subscription model from as little as £5 per month.
“Asking for a week’s rent as an up-front fee went someway to alleviating the initial financial burden when moving home,” explains Hooker. “However, it is still a large proportion of someone’s savings that tenants would rather hold back for themselves in case of emergencies.”
There’s bad news for agents, though – Ome doesn’t pay any commission. “Ome is about the best option and pricing for tenants while providing trusted protection for landlords. We do not want agents pushing an alternative to traditional deposit protection if it is not right for the tenant or landlord,” he adds.
Cash deposits ‘here to stay’
The other traditional deposit schemes are more defensive and do not believe the status quo will change much in the short term.
“There is no sign of the attractiveness of the traditional cash deposit going away,” says Steve Harriott, CEO of the Tenancy Deposit Scheme (TDS).
It’s likely that the market will evolve so that those tenants with an excellent claims record end up getting the product at a lower cost than the typical one-week’s-rent premium. Steve Harriott CEO, TDS.
“At the end of September 2020 there were almost 4.2 million cash deposits protected in England and Wales with the tenancy deposit protection schemes. It’s difficult to get any data on how many deposit replacement insurance products are currently live but I’d be surprised if it’s more than 150,000 across the sector; so cash deposits remain by far the dominant product.”
He accepts the new model works for some people. “It’s clear that the deposit replacement insurance products are providing a good solution for some tenants; those who perhaps cannot find the cash to put up for a full deposit or those who can find the cash, but prefer to use their own money for other purposes.”
He adds, “It’s likely that the market will evolve so that those tenants with an excellent claims record end up getting the product at a lower cost than the typical one-week’s-rent premium.”
The Deposit Protection Service (DPS), the first government-authorised scheme, says there are several advantages to physical deposits, including encouraging tenants to maintain a property’s condition in line with their tenancy agreement.
“Using a tenancy deposit scheme directly links a tenant’s obligations under their tenancy agreement – for example, addressing damage that occurs outside of reasonable wear and tear for the tenancy length – to the refunding of their deposit money, making it a transparent process. The deposit system therefore builds trust with tenants and repeat business for letting agents.
“Under a deposit scheme, justified claim money is physically available and quickly payable to the landlord or letting agent, up to the value of that deposit. Last year, we awarded around £115m to landlords.
“The DPS does not pass on the costs of its processes to landlords or tenants and does not share tenant data with third parties, for example with debt recovery agents.”