One of the least pleasant aspects of renting is having to fork out for a rental deposit, often before you get back the deposit on your previous place. And given that many people have few savings (two thirds of renters in the UK estimated to have no savings at all), rental deposits greatly increase the already substantial financial burden of moving.
Deposit replacement schemes ostensibly offer a solution. However, just how beneficial they are to tenants in the long run is doubtful. If you are a renter and are considering signing up to one of these schemes, or the property you're looking at offers it in lieu of a traditional deposit, there are several things you'll need to be aware of, the most important one being the considerable variations in the terms of the different schemes available.
This is how they work. In short, when you take out a deposit replacement scheme, you are taking out an insurance policy against any future damage to the property you are about to rent. Typically, you will pay one week's rent as a non-refundable down payment, and, in some cases, an annual, or even a monthly fee on top of that.
One week's rent seems like a sweet deal in comparison with the usual five or six weeks' rent for a deposit, but it's money you will never get back. What's even more worrying is that some of the deposit replacement schemes used by landlords and agents make you, the tenant, liable for any future claims. Other, more decent schemes ensure that the landlord/agent will pursue the insurer, with the tenant liable for the excess amount only (as with other insurance products), and an arbitration fee of around £100 to £200 in case of any disputes.
It's clear that even with the more reasonable deposit replacement schemes, renters will lose out financially in the longer term, even though they are released from the initial burden of a traditional deposit. As Hannah Slater of Generation Rent explains, 'Fundamentally, deposit replacement products are a cash-flow solution rather than an affordability solution.'
While traditional deposits are 'cost-neutral' because you will get the deposit back minus any damages to the property at the end of a tenancy, a deposit replacement scheme is in essence a 'poverty premium' for people who can't afford a traditional deposit.
Our advice? Always research any deposit replacement product thoroughly, and read the small print on who would be liable for claims, and what the additional charges are. And consult our beginner's guide to renting.