For most tenants, getting the funds for a new deposit while waiting for their existing one to be returned can be difficult. With the latest update of the Renters Reform bill, we take a look at what the government are suggesting to combat this barrier in the Private Rental Sector (PRS).

In the latest release of the Renters Reform Bill, the government has laid out its plans to improve the Private Rental Sector in the UK. Plans include:

• Reforming grounds for possession and abolishing Section 21 evictions
• Improving dispute resolution, including the introduction of a new Ombudsman for private landlords
• Creating a positive renting experience for tenants
  
  

One thing that wasn’t commented on too much, that had been quite prevalent in previous years, was what’s going to happen with tenant deposits.

Since 2007, deposit protection has been mandatory in England, requiring landlords and agents to keep tenancy deposits within appointed schemes.

In England Wales and Northern Ireland, there are two types of schemes that can be used; Custodial and insurance-backed.

Scotland only uses custodial schemes. Legislation concerning deposits was changed in 2012 to try and minimise the number of unfairly withheld deposits, and ensure that deposits are protected and returned quickly and fairly.

Impact of proposed changes to deposits

The proposed change to move all tenancies to one system of periodic tenancies shouldn’t see much of an impact on deposits, as a deposit is paid at the start of the tenancy. One change for landlords and letting agents who renew tenancies on a new fixed-term tenancy will be that they won’t be required to re-protect the tenancy deposit, as it will still be covered from the initial tenancy agreement.

We can see that there wasn’t a big impact in Scotland after their move to periodic tenancies.

Lifetime deposits

Initially raised in 2019, lifetime deposits were proposed as a solution to the affordability issues caused by cash deposits. In theory, a deposit would be ‘passported’ from one tenancy to the next. This would eliminate the need for tenants to drum up a new deposit, whilst waiting for their existing deposit to be returned - the ‘double bubble’ effect.

In reality, this would only work as long as there was no risk of any deductions being taken from the deposit for damages or repairs to the existing property. With over 50% of tenancies ending with a claim or deduction being made, it would be difficult to make this a reality.

So, it’s no surprise that the government is looking to move away from this concept. In the latest version of the Renters Reform Bill, mentions of lifetime deposits were limited and added to the end of the white paper.

What else can be used to address the affordability issue around cash deposits?

Deposit replacements have been around for a while, but they started becoming popular with the introduction of the Tenant Fee Ban.

In short, deposit replacement schemes offer tenants and landlords an alternative to the traditional ‘cash’ deposit. Instead of tenants paying the equivalent of 5-weeks’ rent, they will pay a non-refundable fee to purchase a product or join a service that offers the landlord protection against financial loss.

In the Renters reform bill white paper, the government indicated that they will be looking to the private market for solutions. One approach could be to mandate choice. Currently, tenants must have the option to go with a cash deposit.

It would make sense to give tenants the option of using a deposit replacement instead of a cash deposit, as they are not always the best solution for every tenant. For those in a higher income bracket, the double bubble effect wouldn’t have much impact on their ability to pay a new deposit. For lower-income tenants that don’t have access to social housing, the impact is much greater.

“Deposit replacement products have come a long way since launch and do represent a good deal for all parties, especially in the current economic context with inflation around 10%!” - Ben Grech, CEO, Reposit.

Deposit Bridging Loans

Following the call from the government for evidence of the barriers private renters experience when moving home, the market has begun to develop solutions, including loans to bridge the period where deposit requirements overlap.

A deposit bridging loan allows tenants to borrow money to fund their new deposit. This can help with the initial affordability issue while waiting for their initial deposit to be repaid. However, tenants are still required to pay back the borrowed money, often with interest. Long-term, it doesn’t resolve the affordability issue for tenants.

With the bank of Mum and Dad also a popular solution for borrowing money to fund a deposit, there is also the question of whether tenants would borrow from a lender who charges interest if there is an interest-free option in the form of friends and family.

Bridging loans still need to be tested on a large scale, and with the age of tenants trending upward, it remains to be seen whether it will become more mainstream.

What can be done in the meantime?

The most simple solution would be to speed up the time it takes to return a tenant’s deposit. The end of tenancy process can be lengthy, so it is important to encourage staff to complete each step promptly.

Most deposits are returned, in part or full, within one to three weeks. This can take longer where the deposit is disputed, either through alternative dispute resolution or in the courts.

This process could be sped up by using technology to automate many of these actions; Sending the tenant a reminder of their obligations before the tenancy ends, uploading inspection results etc. to a platform that will automatically send to the tenant for agreement.

If there is a dispute regarding the deductions, making sure that you are working with a good dispute resolution service that aims to get a result quickly can also help to cut down the time taken to return the deposit.

Deposit replacement providers, such as Reposit, already provide support for a speedy check-out process. Their total check-out process time is just 30-40 minutes, compared to 68-120 minutes with a cash deposit*.

Check out our full timeline comparisons for cash deposits vs. Reposit here.

Saving up for a first or additional deposit is becoming more challenging. Our data shows that the average deposit has now risen to £1183, and with fuel bills set to rise again this winter, something needs to be done to support those in the PRS.

Many in the industry were hoping that mandating proving tenants with a choice between cash deposits and deposit replacement would have been included in the latest release of the Renters Reform Bill. Alas, this was not included.

With the full impact of the cost of living crisis yet to be seen, we may well see the powers at be within the sector making this decision for landlords and letting agents.