Is There an Alternative to Tenant Deposits?

As part of the new government housing bill, one of the items under discussion, is capping the size of a deposit to a maximum of 4 or 6 weeks rent.

For many landlords, the current average deposit of 6 weeks can seem inadequate if your tenant causes significant damage in the property or has failed to pay their rent.

For many tenants, the cost of moving into a new rental property can be substantial, on average around £2,000 for their first months’ rent and deposit. On top of this, if they are moving from an existing rented property, they are unlikely to receive their deposit back from their previous tenancy, before having to pay the deposit for their new tenancy.

As a result, a number of schemes have started to emerge that offer tenants a deposit free option to renting a property... But this is a good thing for either the landlord or the tenant?

There are a few schemes that have emerged:

1. Tenants Pay an Insurance Rather Than a Deposit

In this instance, the tenant pays either a one-off premium or an annual premium rather than paying a deposit.
On-off payment schemes are preferable, as there is no need to ensure the tenant has not simply cancelled the policy or failed to renew the policy.

The limits to this are very similar to deposit schemes. The cover is usually up to 6 or 8 weeks rent, payment is based on evidence provided by the landlord or their agent, and there is a dispute resolution service should the tenant and landlord be unable to agree.

However, for the tenant, not only do they pay for this insurance premium, they also pay for any deductions at the end of the tenancy, and should they go to dispute and lose, they also pay the cost of an adjudicator.
If the tenant doesn't pay, the insurance company pays any dilapidations to the landlord, and can then pursue the tenant for any unpaid amounts.

For good tenants, they as a minimum lose their insurance premium regardless of the way they return the property.

For poor tenants, they could end up paying more than a traditional deposit, but the landlord still cannot recover anything further without taking private legal action.

2. Landlords Pay for Insurance

For many landlords, recent and upcoming changes in legislation, have often meant the costs coming back to the landlord, so understandably, many are not looking to incur extra costs.

Martin & Co already offer both a rent guarantee insurance and a legal cover insurance to our landlords.
However, there are a number of schemes emerging now where are landlord can take additional cover for additional damage caused in a property, over and above what can be recovered from a deposit (if this is not already covered by your buildings and contents insurance).

This would include damage to the property, unpaid rent or theft by the tenant, but crucially would have a much higher limit, up to £10,000 compared to an average deposit of £1,000.

3. The Tenant Joins a Warranty Scheme

In reality, this works in a very similar way to the insurance scheme above.
The only different is that this tends to be a larger one-off fee, whereas the insurance scheme tends to involve an annual premium. Again, the fee is non-refundable.

When the new housing bill passes into law in 2019, one of the main criteria will be that tenant cannot be forced to pay any types of fees as a prerequisite to renting a property, so landlords or their agents will not be able to insist on one type of scheme over another.

Landlords will obviously be able to take out their own additional insurance should they wish, but tenants will either have to pay a traditional deposit as they do today or be offered the choice between an insurance type scheme and a traditional deposit.

Martin & Co will be looking into offering both extended insurance for landlords and potentially deposit free options. The latter will only be offered on tenancies with the landlord’s consent.

Our view is that most of the current schemes, will ultimately cost the tenant more money in the long run, but for those tenants who struggle to raise a traditional deposit, or rent a single property for a long term, this may become an attractive option. Some schemes may also be deemed illegal under the new housing bill.