While the pandemic has been tough time for many, young, single renters have been hit particularly badly.
They are more likely to be employed in struggling industries such as retail and hospitality, and to have less secure jobs overall.
Having not accrued the years of service to require a big pay-off, they are also cheaper for companies to make redundant.
Looking for an alternative: Young renters might come across companies offering deposit alternatives as they try to get the cash together to move from one home to another
Many have chosen to move back in with their parents – but for those who don’t have that option, times are hard.
This is particularly the case if they need to move to a new rented house, as finding hundreds or thousands of pounds to put down as a deposit can be challenging.
‘With the financial effects of Covid likely to hit hard this year, finding extra cash for a deposit could be tough for many renters,’ says Matt Hutchinson, director at the rental listings website SpareRoom.
With the median monthly rent now standing at £725, according to the Office of National Statistics, a five-week deposit – the maximum a landlord can charge – would be just over £840.
For someone on the average annual income of £29,900 after tax, this would represent about a third of what they are paid each month. Many young renters will earn less than this, though.
Given that tenants usually have to pay their first month’s rent upfront, as well as moving costs, this can quickly add up to the majority of a month’s earnings.
In the last couple of years, several companies have sprung up claiming to offer a new solution to this problem.
They brand themselves as ‘deposit alternatives’ and include Canopy, FlatFair, Ome, Reposit and Zero Deposit.
Average room rents in different regions across the UK, according to Spareroom. High rents in some areas could make it more difficult for tenants to save up a rental deposit
‘Paying four weeks’ rent and a five-week deposit upfront is difficult for most people,’ says Tahir Farooqui, founder and boss of Canopy, explaining why the company – which also offers other services – launched its deposit alternative product.
‘People are finding themselves stuck in the same property, because their cash deposit is stuck in that property until they leave.’
Last week, a new player called Fronted launched, run by former Monzo and Apple employees. Pre-launch, it says it had 1,000 people registering interest in the scheme every month.
Advertised by colourful websites with quirky illustrations, these schemes are clearly set up to appeal to Generation Z.
Some say they offer a lifeline for tenants who might otherwise be unable to move – but renters must pay non-refundable charges or interest to join them.
Others say tenants don’t understand what they are being sold, and worry that some of the products are not sufficiently regulated.
Canopy is one of the companies that will secure a tenancy with the landlord in exchange for a fee from the tenant
So how do deposit alternatives work, and what should tenants know before signing up?
Most of them involve the tenant paying a smaller, non-refundable sum – often one week’s rent – or a monthly ‘membership’ fee, to the deposit alternative provider.
In return, the company will offer a guaranteed security to the landlord, in place of a traditional deposit. No cash actually changes hands.
‘What it often comes down to for the tenant is weighing up taking on a smaller, fixed cost, rather than having to pay a bigger deposit in the hopes of getting it back at the end of the tenancy,’ says Hutchinson. ‘
As so many tenants have experienced issues getting their deposit back, accepting a smaller ‘known’ hit can feel like a good option.’
Although the deposit alternative schemes often help to settle deposit disputes, renters are still liable for damages and unpaid rent at the end of their tenancy.
Canopy, Flatfair, Ome, Reposit and Zero Deposit all work in this way, with each having their own separate fee structure for tenants and guarantee for landlords.
Estate agents are sometimes responsible for selling deposit alternative products to tenants
Fronted is different. It pays the cash deposit on behalf of the tenant via their estate agent, and then they pay it back throughout the course of their tenancy, plus interest of 12.5 per cent. There are no early repayment fees.
The benefit of this for tenants is that the landlord does not have to know that they have not paid the deposit themselves.
‘From our conversations with landlords, they just want the tenants to turn up with money – they don’t mind where that security is coming from,’ says Jamie Campbell, chief executive of Fronted.
How can deposit alternatives help renters?
Not needing to find an upfront deposit is the main advantage for tenants – and this doesn’t just apply to first-time renters.
‘Affordability is more important than ever, because tenants are more cash-strapped than ever,’ says Franz Doerr, founder of Flatfair.
These products can also help to bridge the gap for renters who need to pay the deposit on a new property before their old one has been returned to them.
Given that most landlords want to keep hold of the deposit until the tenant has left the property and checks have been carried out, this is very common.
Fronted offers to pay deposits for renters, which they pay back with interest of 12.5%
‘Deposits are often the biggest pain point for renters, particularly when they have to come up with a deposit to move home before getting their last deposit back,’ says Hutchinson.
Some of the policies have added extras, too. For example, Canopy markets its product as ‘insurance’ for renters, because it will not pursue the tenant for unpaid rent at the end of their tenancy if they lose their job through no fault of their own, or are unable to work due to injury or illness.
What are the drawbacks?
The most obvious drawback is that tenants do not get back any money that they pay as a one-off fee, membership charge or interest rate.
For this reason, Dan Wilson Craw, deputy director at the campaign group Generation Rent, believes that these schemes are ‘not the solution’ to unaffordable deposits.
‘Unlike refundable deposits, tenants don’t get the money back – and if the landlord claims for damage at the end of the tenancy, the tenant pays for this on top of the original fee,’ he says.
|Name of scheme||What does the renter pay?|
|Canopy||One-off payment, equivalent to 10% of an eight week rental deposit for a one year contract|
|Flatfair||One-off ‘check-in fee’ of one week’s rent plus VAT|
|Fronted||12.5% interest on money borrowed, paid monthly over 12 months|
|Ome||Monthly fee calculated based on circumstances. Average £9 per tenant, per month|
|Reposit||One-off payment equivalent to one week’s rent|
|Zero Deposit||One-off payment equivalent to one week’s rent|
Perhaps surprisingly, Farooqui says that if a tenant can find the cash to pay a deposit, they absolutely should. ‘If you have cash, always pay a cash deposit. If you use [a deposit alternative], you won’t get that cash back,’ he says.
However, he believes the fees are proportional.
‘With everything great, there is always a downside. But the product is affordable – generally whatever scheme you choose, you will pay a 10 to 12 per cent premium,’ he explains.
Canopy charges a fixed fee for its services. A renter signing a one-year contract would need to pay 10 per cent of the eight week deposit that the firm offers landlords.
Even if a renter is comfortable with the initial costs, some of the schemes charge an annual renewal fee – so if they were planning to be in their home for many years this might make deposit alternatives less attractive.
Under some schemes, tenants claim to have been charged to switch back to a traditional deposit, or to raise a dispute at the end of their tenancy.
The Deposit Protection Service, one of the three Government-backed schemes where landlords must hold traditional tenancy deposits, points out that it offers its services without any costs to landlords or tenants.
A spokesperson for the DPS told This is Money: ‘The overwhelming majority of UK tenants continue to place their deposit with a Government-approved, free-to-use, deposit protection scheme such as The DPS.
‘We don’t pass the costs of our processes onto landlords or tenants, and do not share tenant data with third parties, for example with debt recovery agents.’
Flatfair will secure a tenancy in exchange for a fee of one week’s rent plus VAT
Concerns have previously been raised about letting agents not being clear enough about this when signing up renters to deposit alternative schemes. Agents often receive commission for doing this, so if you are considering signing up to a deposit alternative, make sure you do your own research.
Regulation of these firms is also an issue. Deposit alternative schemes can legally run without being registered with the Financial Conduct Authority in some circumstances, so not all of them are signed up.
Those that are regulated by the FCA include Canopy, Reposit, and Zero Deposit. Fronted is part of the FCA’s ‘regulatory sandbox,’ which exists to test new and innovative products.
What are the alternatives if I can’t afford a deposit?
Depending on the level or the fee or interest rate, taking out a personal loan to pay the deposit, or putting it on a credit card, might be a cheaper option – provided the tenant can qualify.
‘With deposit-free schemes costing a week’s rent with very little protection in return, borrowing the money to pay a full five-week deposit might make more sense for tenants with no savings, as long as the interest is affordable,’ Wilson Craw adds.
But the deposit alternative schemes would beg to differ. Fronted’s Campbell says schemes like his stop renters from having to use ‘high-interest credit cards; predatory loans or insurance-based products’ which ‘don’t have the renter’s interest at heart.’
At home: There are a variety of different options for renters who need to find a new place to live but cannot get all of the money together for a deposit in one go
Before taking a loan or joining a deposit alternative scheme, renters could consider asking whether their employer offers an interest-free deposit loan for staff – something which larger companies are increasingly doing.
Some councils also provide deposits for tenants on low incomes, but this is mostly reserved for people who have a lot of existing debt.
What’s in it for landlords?
These schemes offer a clear incentive for tenants, in that they avoid paying a deposit – but this might raise questions about the their financial stability. So why would a landlord sign up?
Firstly, deposit alternatives usually offer them more protection than the five weeks rent that they can charge tenants – some offering to pay up to the equivalent of eight weeks’ rent in the event of a dispute which is found in the landlord’s favour.
‘The landlord gets exactly the same protection as if the cash was in the bank, in fact they have more protection – but without having the cash placed physically in a deposit scheme,’ says Doerr.
Some of the providers claim that they help landlords to rent their properties quicker, too.
‘We allow thousands of landlords to offer much more convenient and also affordable options for their tenants, reducing the marketing time on their properties by up to 30 per cent,’ says Doerr.
He says that landlords are increasingly opting to pay FlatFair’s fee for their tenants, because it helps speed up leasing.
Landlords also avoid the hassle of administering and returning deposits – money that they cannot earn any interest on as they must be held in Government-backed schemes.
However, registering with the deposit alternative schemes brings with it its own administrative burden, which varies depending on which one they use.
What happens if there is a dispute?
With the exception of Fronted, no cash deposit is put down in deposit alternative schemes – but if there are damages to the property or unpaid rent at the end of the tenancy, the landlord still needs paying in hard cash.
Most deposit alternative providers have a dispute resolution service to try and get claims settled amicably.
Traditional deposit protection schemes offer a similar process for adjudications, so this process should not be that different to what you would expect in a normal tenancy situation.
‘Under a custodial scheme such as ours, if a landlord makes a claim against part of the deposit – for example in the case of damage that goes beyond reasonable wear and tear – tenants also have the opportunity to agree or disagree in an open and transparent online process,’ the DPS spokesperson told This is Money.
‘Tenants that follow the terms of their tenancy agreements should expect to get back their deposits and last year we returned more than £385.7million to tenants at the end of their tenancies – money that they can immediately use for their next deposit.’
Moving on: Deposit alternative schemes often say they can settle disputes more quickly when a tenancy ends, because they pay the landlord first and recover funds from the tenant later
The main difference is that, in a deposit alternative scheme, the tenant will need to pay the landlord the money they owe directly, rather than having it deducted from an existing deposit.
Arguably, this provides an extra incentive for tenants to keep the property in good condition.
But if the tenant is paying for the deposit alternative service, will landlords not be worried about bias in the adjudication process? Doerr insists that it is totally transparent.
‘We are not taking a side, we are just facilitating the end of tenancy. It is similar to what the deposit schemes do, we actually work with the deposit schemes and pay them to turn it around much quicker,’ he says.
FlatFair, like some other deposit alternatives, has a partnership with one of the three Government-backed deposit protection schemes which helps it to run its disputes process.
Can’t the tenants just disappear and expect the company to pay?
To avoid tenants disappearing and requiring them to take the fall, the deposit alternative companies will pursue tenants for the money they owe – for example by using debt collection agencies. If this happens, the tenant will also be liable for costs related to this.
This incentivises tenants to resolve the claim with their landlord themselves before it gets to that stage.
One of the claims deposit alternative companies make to landlords is that they settle end-of-tenancy disputes more quickly than if a tenant had paid a traditional deposit – often in a matter of days.
To allow them to make this promise, the companies keep a reserve of the money they are paid by tenants, and most are also backed by large insurers. This means they can pay landlords upfront and pursue the tenants afterwards to get the money back.
What should renters do before using a deposit alternative?
If a renter can get the cash together to pay a deposit, that is the least costly way to do it. They should consider asking family or friends for a loan if appropriate, or taking advantage of a scheme at their place of work if one is available.
If not, they should make sure they explore all their other options for borrowing the money, for example by comparing the interest rates on a small personal bank loan with the fees that alternative deposit schemes charge.
It is also worth comparing the different deposit alternative schemes against one another, as one might suit their needs more than another.
Above all, renters should bear in mind that, colourful websites and claims of revolutionising the renting experience aside, these are financial products.
If they end up in a sticky situation at the end of their tenancy, they could still be tracked down by a debt collection agency – and there is nothing fun about that.