Most renters will be familiar with the drama that surrounds deposits.
The average deposit in London is an eye-watering £1,765, according to the Tenancy Deposit Scheme. But saving up hundreds of pounds is only half of the battle.
Recouping all of your cash at the end of your tenancy is often a huge headache, and if you’re moving into another rental property, you might be forced to cough up another lump sum while you wait (or beg) to get your deposit back on the first home.
This has spurred a new type of model: deposit-free renting. The scheme is effectively an insurance policy to cover any damages to the property at the end of a tenancy, instead of putting up a deposit.
Some deposit-free schemes charge tenants a small fee on top of their rent every month, but most charge a one-off, upfront fee that is equivalent to, say, a week's rent instead – a far more affordable option for cash-strapped millennials than a deposit.
The policy provides the landlord with a guarantee that, if the tenant does not settle their liabilities at the end of the tenancy, the scheme will step in and pay on their behalf. Schemes that pay up then seek collection from the tenant for some or all of the amount.
Such schemes might sound ideal on the surface, and they’re useful in a fast-paced subscription-fuelled economy. But the problem is that some companies don't seem to be playing fair.
Take the scheme offered by estate agent Leaders Romans Group. Imagine you're a renter with a 4.8 per cent deposit-free fee on top of your £800 rent every month. Over the course of a year, all those small fees add up to more than £460. You'd expect tenants to then be covered if a claim is made against them, but that's not the case either – meaning renters have to stump up even more money if anything goes wrong.
And, unlike the deposit, this fee is a payment that you don't get back – regardless of whether you left the property in good condition.
A spokeswoman for Leaders points out that tenants are given the choice of either a traditional deposit, or the “no deposit” option, which includes benefits like an energy tracker tariff and a link to Experian so they can build a credit history.
“Unlike many similar products on the market, there is no up-front payment, making renting a home more accessible for many tenants,” she says.
However, she confirms that, in line with some other deposit-free schemes, the tenant remains liable for damages.
Why are tenants who are paying such huge fees still on the hook for damages? It's like a very expensive payday loan.
Many schemes ask for just a week’s rent, and are therefore far cheaper in the long run. But it still begs the question: if tenants are paying hundreds of pounds for an “insurance policy”, what are they getting in return? Why are they paying for the protection, when they are not getting any cover themselves?
One FCA regulated company called Zero Deposit builds history with each renter, meaning good tenants will be offered discounts for future purchases.
"It is essential that tenants understand that this is a choice, but also that the nature of the product is explained carefully to them so they understand what they are buying and are not misled,” says Jon Notley, co-founder and chief executive of Zero Deposit.
"Worryingly, there are products emerging in the market that are avoiding regulation, along with the standards and protections that come with it. Some of them are excessively pricing their product without the protection of an underwriter, the compensation scheme, or the ombudsman. Our view is that this is bad for consumers, and we are keen to distance Zero Deposit from this end of the market."
One of the few schemes to offer tenants some protection is Canopy. Renters pay an upfront fee equal to around 10 per cent of a standard deposit. If there is a claim at the end, the tenant pays a 10 per cent excess – so the tenant would pay £50 on a £500 claim, and the insurer (Hiscox) would pay the rest. Any disputes are dealt with by the insurer’s dispute resolution team.
The system works by Canopy incentivising good behaviour in its renters – so they get rated by landlords on the app, can keep track of all their bills, and (provided they pay everything on time) improve their credit score. Like Zero Deposit, good tenants would also get cheaper premiums – similar to a no-claims discount for car insurance.
"The whole point of insurance is protection, and if you’re paying for it, you want to be protected – otherwise why bother?" says Canopy chief executive Tahir Farooqui. “Why are tenants who are paying such huge fees still on the hook for damages? It’s like a very expensive payday loan.”
These schemes prey on those with no savings and poor access to affordable credit, effectively creating a poverty premium for renters
Hannah Slater, policy and public affairs manager of campaign group Generation Rent, says tenants should be extremely wary of schemes which charge non-refundable fees in lieu of an upfront deposit, but offer little protection against the costs of damages.
“While marketed as improving affordability for renters, these schemes prey on those with no savings and poor access to affordable credit, effectively creating a poverty premium for renters.”
Slater says deposit innovation is “sorely needed” to reduce the cost of moving, but she says passporting deposits between tenancies would be a much fairer way to achieve this.
Driving a hard bargain
The problems don’t end there.
While some deposit-free schemes like Canopy's offer free services to letting agents (like referencing), others will give letting agents generous commission for each renter they get on board – perhaps part of the reason some schemes are demanding so much money from tenants.
While the government is trying to improve the rental market by banning tenant fees, Farooqui reckons that this is a way for unscrupulous agents to get the money “at the back door”.
He says that some companies need to ask themselves who they are solving the problem for: the renters, or the letting industry.
“Our principle is doing the right thing for renters, landlords, and letting agents – rather than taking from one and giving to the other. Later down the line, if tenants don’t have any money to pay off these claims, and yet these letting agents have taken a commission, the FCA is going to ask why. To me, this is another PPI scandal in the making.”
That's not to say that responsible schemes can't work. Many renters would be comfortable paying a £100 non-refundable fee if it meant they didn’t have to stump up a grand or more upfront.
There is £4.1bn that is currently locked in rental deposit schemes, which is money that could help thousands of young people buy their own homes if it were released.
But the trick is making sure that renters know what they are signing up for – and don’t end up in a far worse situation than if they had saved up for a deposit.
With some big property firms partnering with these schemes, this is something the regulator should be looking at sooner rather than later.