A big issue for anyone renting a property, whether for the first time or moving from one rented home to another, is raising the deposit.
The deposit is usually equivalent to five weeks’ rent, and according to the Tenancy Deposit Scheme, the average deposit in England and Wales is £1,041. In London, it’s much bigger, at around £1,750.
An increasing number of deposit alternatives are seeping into the market, intended to make it easier for tenants to save a deposit for a rental property.
Traditional Deposit Versus Deposit Alternative
Traditional rent deposits may require tenants to dip into savings or borrow from friends and family. However, the advantage is that at the end of a tenancy, the deposit is returned, minus any deductions for property damage or unpaid rent.
The new Deposit Alternative schemes used by some landlords and letting agents have the advantage to the tenant of requiring a much smaller one-off fee, usually equivalent to just one week’s rent.
But the disadvantage of these are that the one-off fee is non-returnable, there may be small monthly charges too, and tenants pay to cover any damage identified when they move.
How Do Tenancy Deposit Alternatives Work?
There are at least eight major Deposit Alternative operators, but most operate along similar lines and have roughly the same rental deposit rules.
The appeal to renters is that they need only a small holding deposit. This may, in turn, give some renters a wider choice: for example, they may be able to consider a larger home or a more expensive location because they have only a small deposit to pay. A traditional deposit on a rental property of that size or in such a location may have been unaffordable.
For landlords and agents, Deposit Alternatives are effectively insurance schemes.
In return for the one week’s rent paid by the tenant to start the scheme, the provider gives the landlord cover for any damage or unpaid rent up to the equivalent of six weeks – that’s a very similar protection to the traditional deposit scheme.
If, when a tenancy ends, there is a dispute over alleged damage or unpaid rent, then most Deposit Alternative schemes use an independent arbitration system; again, this is similar to what happens with traditional deposits.
Additional Fees for Deposit Alternatives
- Deposit Alternatives will always involve tenants ‘losing’ money because they must pay an initial one-off non-returnable fee.
This is unlike the traditional system where, if they return the property in good condition and are up to date with rent, the deposit for the rental property is returned in full.
- Some Deposit Alternatives involve a small monthly non-returnable fee as well, which can add up to a substantial sum over time.
These fees are often disclosed in the small print of the tenancy agreement and so can be overlooked by inexperienced renters who are unfamiliar with the paperwork and procedures involved in renting a property.
- Finally, although it is not necessarily disclosed to the tenant, some letting agents and landlords who promote Deposit Alternatives to tenants will get a ‘referral fee’.
In other words, this means part of the tenant’s initial upfront non-returnable payment, in fact, goes to the agent.
Must Tenants Use Deposit Alternatives?
Since the introduction of the Tenant Fees Act, agents and landlords offering Deposit Alternatives must do so as an option only.
Any tenant can, if they wish, choose instead to use a traditional tenancy deposit system.
Which is the Best Security Deposit Scheme?
Deposit Alternative schemes are still new and tenants, landlords and agents are all relatively inexperienced with them; in addition, there has so far been little guidance on how such schemes should be sold to tenants, to ensure renters know the pros and cons.
Some schemes are registered with the Financial Conduct Authority, which is the regulator for almost 60,000 financial services firms; however, it is so far not clear whether FCA registration means a Deposit Alternative service is more suitable or secure for tenants.
What Rental Experts Say About Tenancy Deposit Alternatives
There is widespread acceptance that high traditional deposits can be a barrier for renters, and therefore that a Deposit Alternative can be both tempting and genuinely useful.
But some organisations urge caution, advising renters to research the scheme they choose and the fees it charges.
Campaign group Generation Rent says: “Some are decent options, but others – particularly those which charge a monthly fee – seem downright exploitative.”
And Citizens Advice Bureau adds: “We have concerns that these schemes allow landlords to sidestep restrictions imposed by tenancy deposit protection requirements introduced by
the Housing Act 2004 and caps on deposits introduced by the Tenant Fees Act 2019.”
In the future, there may be ‘Lifetime Rental Deposits’
The Conservative party made a pledge in its successful 2019 General Election manifesto to introduce ‘lifetime deposits’ and now that it is in government it says it will push forward with legislation in the near future.
The principle is that a deposit paid for a first rental property could be transferred to the next property when the tenant moves. However, it remains to be seen what would happen if some or all of the initial deposit was not returned because of damage or unpaid rent.
Legislation to make this law would take up to two years to get through Parliament, and no time has yet been allocated by the government for this – so it is not a near term solution to the renters’ dilemma of whether to choose a traditional deposit or a Deposit Alternative.
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Last Updated: January 3rd, 2024
