Myth 1: Tenants who choose deposit alternative products are more likely to fall into arrears
Producing a lump sum of five weeks rent cannot reliably indicate whether or not a tenant is financially stable. This was underlined by a survey commissioned by Reposit in early May 2023 which found 30% of renters relied on overdrafts, credit cards, loans or borrowed from family and friends to pay their deposits.
A tenant’s financial capacity to pay the monthly rental cost in full is best assessed by quality referencing and affordability checks carried out by specialist providers. As a minimum, we insist tenants pass a credit history check, identity verification and an affordability check to show their salary is at least 30 times the monthly rent. If the tenant fails to produce one of these required references, they will need to use a UK-based guarantor who meets all the criteria on their behalf or pay six months rent in advance to remain eligible to use Reposit.
By using a deposit alternative product, tenants avoid having to turn to lenders such as credit card companies or personal loans to fund a deposit of five weeks rent and are therefore in a better financial position when moving into the property – reducing the risk of rent arrears.
Myth 2: Cash deposits are FREE for tenants and are therefore a better option
Locking up a substantial amount of cash for a lengthy period is never ‘free’, regardless of whether the amount paid upfront is returned or not. Given the average rent in the UK is now £1,103.19, this makes the average five week deposit around £1,378. With a cash deposit, the tenant has no access to this money, meaning it cannot earn interest for them, nor is it being put to better use right now – it’s dead money!
If a tenant has to turn to a lender to borrow £1,000, credit cards typically charge 23% APR according to Which?, and with this kind of rate, the tenant could be paying up to £230 in interest to cover the cost of a £1,000 cash deposit.
With savings accounts now offering between 3.5% – 4.5% interest, tenants are potentially missing out on annual returns of up to £45 on a £1,000 lump sum because cash deposit schemes are holding their money. Given inflation has reached in excess of 10%, it is eating away at the deposit while it remains locked up. Many tenants would rather put their money to better use right now such as helping to pay for the rising costs of living. With Reposit, tenants are obliged to pay only one week’s rent*, giving them the flexibility to either spend the remaining sum – equivalent to four weeks rent – or save it and benefit from the interest.
Myth 3: Landlords risk not having enough cover at the end of the tenancy
Firstly, deposit alternative products should not be mistaken for tenant insurance but concerns around tenant liability are misplaced. With a deposit alternative the tenant remains fully liable at the end of their tenancy for any valid charges such as damage or rent arrears.
In contrast with common misconceptions, landlords can actually receive MORE protection by opting into deposit alternatives. With Reposit, they receive eight weeks worth of tenancy cover which is three weeks on top of the usual five and is completely free of charge. Reposit’s insurance-backed structure means landlords are guaranteed payment in the event of a tenant defaulting on any charges normally covered by a cash deposit. Reposit is independently authorised and is currently one of only two deposit alternatives in the UK to have achieved FCA regulated status, meaning it is required by law and regulation to honour the protection offered to landlords.
Reposit’s own data found that across almost 20,000 tenancies, deposits of five weeks rent did not provide landlords with enough protection in 14% of cases. But during the same period, more than half (56%) of agreements ended without any costs incurred by the tenant at all which highlights how deposit alternatives are more fully aligned with the realities of UK tenancies and work more efficiently and fairly for each stakeholder.
Myth 4: Tenants don’t understand what they’re being sold with deposit alternatives and the products are insufficiently regulated
Deposit alternative products are now being recognised as a valuable solution for the industry and were highlighted in the government’s ‘How to Rent’ guide, released on 24 March 2023. The advice to tenants was clear around deposit alternatives – they are fully compliant with the tenant fees act provided that the tenant is offered the choice of a cash deposit or a deposit alternative. The guide accurately states that for the deposit alternative, tenants pay a non-refundable fee up front (usually equivalent to one week’s rent*) and remain responsible for the costs of any damages incurred at the end of the tenancy. Furthermore, the government advised tenants to always check the terms and conditions and to see if it is regulated by the Financial Conduct Authority. Reposit is only one of two providers to fall into this category, operating transparently to ensure tenants fully understand what a deposit replacement scheme means for them. Responsible and regulated providers of deposit alternative products will make sure the tenants’ responsibilities are clear to them prior to purchase.
Myth 5: Tenants choosing deposit alternatives are less likely to look after a property
Understandably, landlords are concerned about the care and upkeep of their properties. Even though a tenant is not paying a cash deposit with an alternative product, they remain fully liable for all damage and rental arrears at the end of tenancy. Reposit is the longest-standing deposit replacement provider in the UK and has dealt with tens of thousands of tenancies. Reposit data shows that 56% of tenancies end without any end-of-tenancy charges at all and when there are charges to the tenant, they are in line with average deductions on cash deposits.
Myth 6: There is no demand for deposit alternatives within the industry
Reposit is growing and sells tens of thousands per year. From their experience with rolling out the product with over 800 partners across the country, the opt-in rate among landlords is over 80%. Data from its integration partners including Tenancy360 and Goodlord also shows that tenant opt-in rates are consistently over 60%.
The government’s inclusion of deposit alternatives in their ‘How to Rent’ guide shows that the industry is recognising deposit alternatives as a valuable solution that is here to stay. As the cost of living continues to bite, demand will continue to grow as landlords seek more protection in the face of increasing rent arrears risks and tenant’s look for solutions to help ease pressures on their cash flow, especially when it helps them to avoid getting into debt.
The level of protection and difference in the quality of protection varies across different deposit replacement schemes so it’s key for agents, landlords and tenants to carry out proper due diligence. This content is for information purposes only. Independent and professional advice should be taken before renting a property, or buying financial products.
