While the cost of renting continues to increase across the UK, the Government continues to grapple with the issue of making renting more accessible and secure, especially for the more vulnerable in our society.

The Renters Reform Bill, announced in the 2019 Queen’s Speech and reaffirmed by the Government in May 2021 will, amongst other initiatives, look to introduce the concept of a ‘lifetime deposit’ to try and deal with the end of tenancy ‘deposit overlap’, whereby many tenants must find a new deposit for a new tenancy before the old one is released by the landlord, agent or authorised deposit scheme. 

Details are currently sparse as to what this ‘lifetime deposit’ will look like and what it means for landlords and renters, but the slowly growing deposit replacement market will surely be looking at these changes as a chance to capitalise on one of their core USPs; deposit replacements already deal with the end of tenancy overlap as no physical cash is involved. 

While the debate in the UK rages as to whether deposit replacements are a good thing or not, elsewhere in the world deposit replacement products are already gaining traction.

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In the US, companies such as Rhino have taken the rental market by storm with more than 1.2m renters now enjoying deposit free renting and the number is growing month on month.

Some states are now progressing plans to legislate for landlords to offer deposit replacements alongside cash deposits, or in some cases as the primary option.

Others are following suit. Leap have announced the launch of their services in Australia to assist the country’s rental community following the lifting of eviction moratoriums and a scarcity of affordable homes in highly populated cities.

In Germany, companies such as Ocyan and Kautionsfrei are well established and other European countries are starting to launch their own versions. 

Common thread

The common thread to all these deposit replacement companies is their commitment to make deposit free renting look and feel the same as using a traditional deposit.

In other words, they provide the same protection and security to both landlords and tenants as they would get if they opted to use a traditional deposit.

Deposit caps differ from country to country, ranging from one month’s rent equivalent up to three months. If a tenant has to find a £1,000 cash deposit, then the deposit alternative provides £1,000 protection to the landlord. There is none of this ‘increased coverage’ that benefits the landlord but actually penalises the tenant who is paying for the product. 

Another constituent feature of all the above-mentioned products is the ability to pay for the deposit replacement monthly rather than upfront, thereby providing an even more affordable option as well as mirroring the behaviours of monthly rental and utility bill payments.

This also means tenants only pay for the length of their stay, rather than a yearly or two-yearly product that may not suit the tenant’s needs.

Transparency

Product literature is transparent, making it explicit that the tenant is always liable for damages and missed rent/bill payments rather than terminology and soundbites that make the tenant think they are purchasing an insurance product that covers their responsibility to pay.

While the UK also has its fair splattering of deposit replacement schemes only one company, Ome, offers both a monthly payment model as well as capping the protection to the landlord at the same level that would be provided by a traditional deposit – i.e. five or six weeks depending on the annual rental amount.

Launched in 2020 and operated by Hamilton Fraser, the people behind the government authorised tenancy deposit protection scheme mydeposits and Client Money Protect, the mission is to offer real choice to the tenant while providing the same protection to the landlord as if they had taken a traditional deposit. 

One decision

Eddie Hooker, CEO of Hamilton Fraser (pictured), comments: “Tenants should only have one decision to make when it comes to security deposits – do I pay a traditional deposit or do I opt for a deposit replacement product? They shouldn’t have to worry that a replacement product that they are paying for benefits the landlord more than if they paid a cash deposit.

“They should also feel comfortable that, should they owe the landlord for damages or unpaid bills at the end of the tenancy, the deposit replacement company will treat them fairly and deal with the dispute in the same way that a deposit protection scheme operates.

“They want to know that their provider has a deep knowledge of the private rented sector and dispute management. Ome deals with these challenges whilst offering a simple monthly payment model for the duration of the tenancy (starting from just £5 per month), and dispute repayment plans should there be monies owed at the end. This is all backed by a business that has been operating in the sector for more than 25 years.”

Landlord’s agreement

“Already the deposit replacement product of choice by some of the UK’s largest student rental businesses, Ome also offers the option for tenants to unlock their current deposit with the landlord’s agreement.

“This feature helps both the landlord and the tenant by dealing with some of the smaller rent arrear issues caused by the ongoing COVID pandemic and other short term employment gaps.

“And of course, because there is no physical cash deposit to pay, tenants have the complete freedom to move home without the fear of the ‘second deposit problem’ caused by traditional deposit protection.

“By looking further afield and learning from the behaviours and practices of other established rental markets, deposit replacements can evolve in the UK and become a real option for many of the UK’s renters.

“By choosing the right deposit replacement product, landlords in turn can rest assured that they continue to be afforded the same protection and support as if they took a cash deposit, but without the regulatory hassle that goes with it.  A win-win for both landlords and tenants.”

4 COMMENTS

  1. Deposit Alternatives look a lot like Payment Protection Insurance, even if they’re clearly explained to tenants, they are more expensive than borrowing a deposit. And they don’t really provide the same protection to Landlords, who are forced to go through a laborius process with tenants to cover damages, rather than just deducting them from the deposit.

    Fronted.rent is now launched. Landlords get the full cash deposit, up front. And it’s wildly cheaper, both in total and in the first month for Tenants. We’re also looking at a Lifetime solution the preserves the integrity of the cash deposit and will be announcing something soon.

  2. Hi Simon, thanks for your thoughts – its great to see Fronted doing well and continuing to provide choice for tenants who may not otherwise have one.

    Deposit replacements aren’t a golden bullet for affordability, but rather an option to help tenants that would prefer a better method to manage their cashflow. Interestingly, Hamilton Fraser’s deposit replacement actually began life as a deposit loan solution and it is something we envisage becoming a strong part of the future landscape for us and the wider market, alongside full cash deposits and deposit replacements. Of course, the “cheapest” option for a tenant will always be the full cash deposit as there are no fees, no interest repayments and it is fully refundable minus any deductions.

    With a focus on cash flow, we decided our first venture into a variation of the traditional deposit model should target a monthly price point of £10 or less for the majority of tenants. Deposit loans unfortunately couldn’t meet this target, but that’s not to say the model doesn’t work for a slightly different market segment. My real opinion is that security for landlords will eventually end up cashless.

    I’d be delighted to have a catch up to discuss further if that would be interesting for you.

  3. Far cheaper to extend an overdraft to use for a new deposit and then pay down the overdraft when the LL returns the deposit from the previous property.

    Most people could achieve an overdraft increase sufficient to cover the few days between paying a new deposit and return of previous deposit.

    If tenants can’t obtain an overdraft increase then they just need to save up for a second one.
    £100 pm shouldn’t be too hard to save.

    Once saved the tenant has it saved for future tenancies.

  4. Here’s a crazy thought.
    Maybe tenants should be advised to save up for a future deposit soon after a tenancy is entered into.
    This way they can move when they wish & also there’d be a buffer of cash accessable for emergencies – like when income takes an unexpected cut etc.
    If a tenant has no way of affording this then I don’t think they’d pass my affordability checks before renting to them anyway as imo it would be irresponsible to lumber someone with a tenancy they can barely afford.
    Is this just too obvious for anyone to suggest?
    They’d only ever need to do this once as when they move it’d be replaced by the refund of the old deposit.

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