Alternate Security Deposits for the Private Rental Sector

The ongoing consultation around the Rented Homes (Wales) (Fees Etc.) Bill is shining light on issues within the renting sector which have received less attention recently. Whereas hard-hitting issues like Section 21 evictions or living conditions have been taking up airtime, recent short-run research done by TPAS Cymru has shown that we should pay attention to how security deposits are managed, returned and transported, and if there are any new ideas.

I recently took part in a consultation session for the above legislation. I wanted to represent real private tenants’ views, so ran a short survey to the Private Renters’ section of our Tenant Pulse opinion survey panel.

For info: Tenant Pulse surveys opinion of all tenants in Wales, be they private renters, housing association or council tenants, or living in supported accommodation. We run surveys on topical housing issues and provide the results to the Regulatory Board for Wales, Welsh Government and other policy makers. Tenant Pulse reports have been used to shape national legislation and more local housing policy.

In our survey for PRS tenants, we asked whether private renters believed that current security deposits are affordable, whether they had ever needed to dispute the return of a deposit, and whether they would be interested in pursuing alternate deposit schemes. We found that over half of respondents found the current system too expensive. Under this system, norm is to calculate security deposit as one month’s rent, or one month’s rent plus £100.

Leading on from this, we found that half of all respondents felt that landlords and agents were deducting unfair amounts from security deposits at the end of tenancies and had disputed these charges through a deposit holding scheme. This has the potential to create barriers to accessing rental properties, for a number of reasons:

1. When a prospective tenant seeks to arrange a lease, they must raise sufficient funds to pay a standard security deposit.
2. If they are moving from one private let to another, they may need to wait for the return of their previous deposit, which can take up to ten days after vacating.
3. If the previous landlord or agent is claiming part of the security deposit and the tenant disputes this, the return of the deposit can be delayed by a few weeks, and/or the amount returned can be significantly reduced.
4. This can cause tenants difficulty in raising the required funds to pay a new security deposit.

This creates a string of issues the tenant must overcome before starting a new let, potentially leading to housing insecurity and the need to rely on homelessness prevention services.

Considering these results, it is perhaps unsurprising that nearly ninety percent of surveyed tenants said that they would be interested in looking at alternatives to the traditional method of collecting security deposits. The last few years have seen a number of schemes created, each offering a different method of providing security against damage. In the list below I have attempted to explain a few of the major ideas with brief commentary. As we go through the process of finalising and implementing the Renting Homes legislation, we will hopefully see greater flexibility with regards to deposits.

Deposit “Passporting”

The concept of “passporting” or transferring portions of a deposit between tenancies has been promoted recently by a range of organisations – from Generation Rent; the rent reform organisation, to the Residential Landlords’ Association, to the London Mayor’s Office Housing Strategy. Whilst passporting isn’t currently available, it is being pushed by tenant organisations and landlords’ organisations alike, so is something to keep an eye on.

In a nutshell, deposit passporting would follow this pattern:

1. When signing a new lease, the tenant would pay the contractually agreed security deposit directly into a deposit protection scheme (instead of paying it to the landlord or agent). This meant that tenants will have greater peace-of-mind and faith that their deposit is being responsibly administrated.
2. The tenant then gives relevant details of this payment to the landlord and agent. Once the deposit has been paid and the details provided to landlord/agent, it is frozen for the duration of the tenancy.
3. At the end of the tenancy, the tenant can request that a portion of this deposit is made available to contribute towards the security deposit for a new lease. As long as certain conditions have been met (e.g. no rent arrears etc.), the landlord will agree to this and the funds will be freed.
4. The tenant can then “passport” this portion of the old deposit into a new one, meaning that the financial burden of paying the new security deposit is lessened.
5. When the tenant has moved from the old property into the new one, the agent/landlord can assess the condition of the vacated property, and either release the remainder of the old security deposit or make a claim on it, as at present.

This has the potential to be a useful idea, as at present, private renters moving from one let to another must have funds available to pay a new security deposit before receiving the old one back. In some of Wales’ most expensive properties, this can mean having up to £3000 tied up in deposits at one time. With the ability to “passport” a portion of an old deposit, renters can have more confidence in setting up new lets, and landlords have evidence of a tenant’s responsible behaviour.

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Insurance-Based Deposits, e.g. Zero Deposit, Canopy etc.

Zero deposit schemes are a totally different way of providing the necessary security to set up a tenancy. They enable those without easy access to funds an opportunity to set up a lease, however, they are not as widely accepted as traditional deposits, and may mean greater long-term expenditure. There are a number of schemes currently active.

Here is an in-brief look at the method used by two of the main schemes, Zero Deposit and Reposit:

• The scheme relies on the backing of a large insurance company to pay out to landlords when needed.
• When taking out a new lease, the tenant pays a non-refundable fee of one weeks’ rent to the scheme. This acts as a guarantee of payment in the event of damage to the landlord. It is not a deposit.
• Part of this fee goes towards making the landlord a beneficiary of an insurance policy run by the scheme.
• When the tenant moves out, the condition of the property will be assessed. If the landlord makes a claim for payment of damages against the tenant, the tenant will be eligible to pay.
• If the tenant disputes these charges, they will be adjudicated by an outside body.
• If the tenant does not pay the charges they are liable for, the insurance partner of the scheme will pay the landlord and will then pursue the tenant for payment.
• If the tenant re-signs a lease at the end of a 12-month term, they will be eligible for a £26 renewal fee.

 

Having the option of setting up a lease without a deposit is a positive development, as those with good credit and renting history may rightly be annoyed with the need to provide burdensome financial security. These schemes also provide an opportunity for those with stable income but no savings to find housing. The downside of these schemes, however, is that they will leave tenants with less money at the end of the tenancy due to the non-refundable fee. Tenants may lose money even when compared to taking out a bank loan to cover the cost of a deposit, as tenants could pay less interest over the course of a year on a £1000 to £1500 bank loan than the cost of one week’s rent.

[source 1, source 2]

Low Interest/Government-Sponsored Deposit Loans

Recently, there have been calls for the creation of a Student Loan Company-style fund to provide low-interest loans to people seeking access to the private rental sector. Whilst not active on a national level, some low interest deposit loans are available from charities. Many of the schemes that exist at the moment, however, require prospective borrowers to be declared homeless before they are able to help. This leaves those who wish to secure a loan to access private rental accommodation, but are in stable housing at the moment, without this option. A proposal for the creation of a company to provide low-interest loans has been written by the Joseph Rowntree Foundation. The main points are:

• Loans would be backed by Government and would be charged at a low interest rate.
• Government would provide funds to social lenders such as building societies, credit unions or local authorities etc., who would administrate the scheme.
• To qualify for a loan, one would need to be earning less than a certain amount (Proposed at roughly £20K for couples) and would need to demonstrate that they are capable of paying the loan back.
• A loan would then be provided for the full cost of the deposit and would need to be paid back in monthly instalments in no more than 24 months.
• The loan would be paid directly to the landlord, who would then need to protect it in a deposit protection scheme, as at present.
• When the tenancy ends, the tenant will receive the deposit back, minus any deductions for damages etc.
• If the tenant moves out before the end of the contract, they will have three months to pay back the remaining balance. They will also be able to apply for another loan for a new tenancy, as long as they are up to date with the payments for their previous loan.

This idea includes positive aspects of many different schemes, as it enables tenants to access private rented accommodation without needing large amounts of cash up-front, allows monthly payments, and also returns the deposit to the tenant at the end of the contract. This also provides opportunities for tenants to move onto other properties and access new finance before the old loan has been paid off in full. There is the potential for this scheme to allow tenants to go beyond finding basic housing. It is possible that this could allow tenants to find accommodation in the private sector that suits their needs, rather than being just-good-enough.

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Get involved

The data for this article was gathered using Tenant Pulse, the Welsh Government-backed opinion survey for people who rent their homes in Wales. If you are interested in taking part and having your voice heard by housing policymakers, sign up at www.tpas.cymru/pulse

Also, we’d be very grateful if you would let us know your thoughts on alternative security deposits by answering a question here.

 

Lewis Greenaway

Membership and PRS Officer