Scraping together a deposit on a new flat is always tough for tenants, with the average amount demanded now more than £1,400 in England and Wales. Would you rather pay an insurance fee of about £300 – which you won’t get back – or find the money for the deposit? That’s the deal being dangled in front of tenants by some of Britain’s biggest letting agents.
Rental deposits have soared in recent years, with tenants frequently asked to put down the equivalent of two months’ rent, which they won’t see returned for possibly years – and then with possible deductions.
But a growing number of agents are being offered “zero deposit” schemes. Since last April, new tenants renting property through Haart have been offered the chance to sign up to the Flatfair scheme.
Instead of paying a traditional deposit, the scheme charges a one-off premium, typically worth just one week’s rental payment. This buys a kind of insurance for the landlord, offering to cover any costs at the end of the tenancy.
Now Haart is extending the offer to existing tenants. They will be asked if they want to get back their deposit, typically £1,407, according to the firm, and sign up with Flatfair.
Alongside Flatfair, there are a number of other schemes including Zero Deposit and Canopy. The basic principle of each is the same. The tenant pays a premium, which buys protection for the landlord. At the end of the tenancy the tenant can move on with no more fees to pay, unless the landlord makes a claim for damage. If that happens, the landlord receives money from the scheme, which will then pursue the tenant to recover some cash.
Critics say that tenants, after paying the insurance premium, can potentially be left with having to fork out again if the landlord claims on it. What’s more, the agents pushing the scheme receive a commission from the insurance company, worth about 20% of whatever the tenant has paid.
It is also apparent that these schemes have only appeared after it emerged that high deposits demanded by landlords were going to be capped. The cap comes into force on 1 June ), limiting deposits to five weeks’ rent.
“Flatfair was founded more than two years ago and the amount we’ve saved tenants from being frozen during their tenancy is into seven figures,” says Franz Doerr, who set up the scheme. “The majority of tenants who are well behaved will benefit from a membership discount for future tenancies.”
Zero Deposit says its scheme is underwritten and regulated by the Financial Conduct Authority (FCA). Jon Notley, co-founder of Zero Deposit, says: “Unfortunately, some providers are launching products that do not fall under FCA regulation. This is dangerous, with landlords and tenants potentially being misled about the cover they are being provided, and certainly without the protections that regulated products provide.”
Groups representing tenants say they cannot see the benefits for most of their members.
Dan Wilson Craw from Generation Rent says zero-deposit schemes are an unnecessary expense for tenants.
“This is money that you will never see again, whereas with a standard deposit if you take care of the property you should get all that money back,” he says. “People need to realise that it’s not taking away their responsibility for keeping the home in good condition and paying the rent. If there are problems you will have to pay what they ask for.”
Even landlord groups are concerned. John Stewart, policy manager at the Residential Landlords Association, says he can see the potential for a loss-loss situation with this type of scheme.
For tenants, he says “it might cut the upfront fees but it is an absolute cost at the end of the day”, while for landlords it was unclear how long claims would take to be paid and what would happen if a scheme went bust.
“The deposit can be held by a landlord if they use the insured scheme, and a lot of landlords would prefer the cash,” he adds.
Stewart says that in some cases there would be an advantage in using this type of scheme after the new deposits cap comes into effect.
“Most deposits are set at the five- week level but there are some times when the landlord asks for more – for instance, if there are pets, or there are high-risk tenants who have a history of arrears.”
David Cox, the chief executive of Arla Propertymark, says his group is not recommending the schemes to members. “We are not endorsing any of these schemes – the market needs to prove itself first,” he says. “We are telling agents that they need to be careful to explain what they are to tenants. In most cases they are not insurance policies and tenants will be pursued for any costs at the end.”
Cap on letting fees and deposits from June
Long-promised restrictions on the charges landlords and agents are allowed to levy on tenants in England and Wales are set to come into force on 1 June after the House of Lords approved the government’s Tenant Fees Bill. The bill still needs to be approved by the House of Commons and the rules will only apply to tenancies signed from 1 June. The new regulations will:
• Ban landlords and agents from charging for credit checks, inventories or references.
• Cap the cost of varying a tenancy at the tenant’s request (such as a name change) at £50, unless the landlord can show it cost them more.
• Cap the amount that tenants can be charged as security deposit at a sum equal to five weeks’ rent.
• Cap the amount tenants can be charged for a holding deposit at one week’s rent.
• Only allow “default fees” for the cost of replacing lost keys or recovering missed rent.