Deposit-free rent – is it all it promises?

Front Door of House with Letterbox

Have you heard of deposit-free rent? Plans first started to emerge in 2017, but concerns are now being raised over whether it is being mis-sold to tenants, who do not fully understand the potential long-term implications.

What is deposit-free rent? 

The deposit-free renting option allows would-be renters to pay a smaller security deposit to their new landlord, rather than a large upfront deposit. What some tenants don’t realise though, is that the money is generally non-refundable. This means renters would not see their deposit returned at the end of the tenancy.

Deposit-free renting is currently being offered as an option by some companies and letting agents, which claim it reduces upfront costs. However, campaign groups and the property ombudsman have warned that companies are pushing this option, without making the implications clear to tenants.

With a conventional deposit, tenants would usually pay one month’s rent in advance (up to a maximum of five weeks’ rent). This is refunded at the end of the tenancy, less any deductions by the landlord for recompense, for such things as damage to the property or rent arrears.

In the case of deposit-free tenancies, the tenants will pay a smaller sum upfront, usually by payment of a week’s rent or a fixed monthly fee. The issue with this is that it is non-refundable and does not cover damages. Therefore, it is possible for the landlord to end up out of pocket in the long run.

Take for instance, Simon, who could not believe his luck when he first heard about deposit-free renting. He was keen to leave the family home and start life with his new partner – but they could not afford the rental deposit of more than £1,000 in the Sussex area. In their excitement and eagerness, they used an agency that offered a new deposit-free option. It wasn’t until they looked in depth at some of the paperwork that they realised the monthly fee payment was something they were never going to get back.

Further down the line, Simon feels not enough was done to highlight this clause and he says that, if the terms had been fully explained to him,  he would not have taken this option. He believes that tenants should not have to ‘hunt down’ the details of such an agreement, but should have these elements clearly explained before being required to sign the contract. Had he been aware of the facts, he would have taken out a loan or remained with parents until he had saved enough for a conventional deposit rather than losing the money, which he described as ‘going down the drain’.

The agency Simon used responded to say it was sorry that Simon felt the terms were not explained clearly enough, but insisted that communication from branch staff by email took place and that he had signed a document confirming the terms.

The Property Ombudsman (TPOS) says other renters have had similar experiences. According to records, one tenant was forced to pay an administration fee to switch to a traditional deposit and another was told they had to use the scheme to rent with a particular agency.

This is at odds with government guidelines that say a landlord or agent cannot insist a tenant uses this alternative way of renting, they can only present it as an option.

A TPOS spokesperson did not think deposit-free rental schemes were an entirely negative system – as long as the tenant understood what they were signing. Indeed, the chief executive of ARLA Propertymark, David Cox, welcomes alternative ways in which renters can secure a home, but must be made to understand the implications.

It is understandable that tenants can get a little bewildered by the number of schemes on the market. There is now a choice of at least eight products from which to choose. All have different terms, which can be confusing for many tenants.

Private renters campaign group, Generation Rent, claims that some tenants feel pressured into snapping up any property that become available, due to the current competitive market. Studies show that more people than ever are renting, with many struggling to get onto that first rung of the property ladder. Of course, letting agents can also take commission from selling these kind of products and some schemes are even owned by the agents themselves.

Generation Rent recommends looking at other options and not panicking by taking the first deal that is offered. Another option might be available from local councils and employers, some of which offer interest-free loans to cover deposits.

Prime Minister, Boris Johnson, recently discussed the introduction of lifetime deposits. A lifetime deposit would allow renters to transfer some of the deposit paid on their current tenancy to the next. The scheme would allow tenants to move without having to find additional deposit money before receiving a refund on their current deposit.

As with any property contract, it is important for tenants to read and understand the contract. If in doubt, get a second opinion or ask a professional to look over the paperwork for you. 

If you’re in the process of buying a new home, a Chartered Surveyor will ensure that you are fully aware of any problems within the property. Ask an Property Surveying independent Chartered Surveyor for a building survey.