Renting: What you need to know about lifetime deposits
With the average five-week deposit estimated to be around £1,000, it’s not surprising that a 2018 Which? survey found that 43% of tenants relied on overdrafts, credit cards, loans or borrowing from family or friends to cover the costs of moving house. The government wants to tackle this problem of short-term affordability and set out plans to introduce a new 'lifetime deposit' in its 2019 Renters’ Reform Bill.
What is a lifetime deposit?
The idea behind a lifetime deposit, also known as ‘deposit passporting’, is that instead of a tenant having to find a new deposit every time they move house, their deposit would be transferred from one tenancy to the next. This means that they wouldn’t have to save up for a new deposit each time or provide a new deposit before the old one has been returned.
How would a lifetime deposit work in practice? While the concept of this new policy is simple enough, how it will actually work is quite complicated. The system runs smoothly if there are no deductions at the end of the old tenancy but, if there are, and especially if they are disputed by the tenant, it’s not clear how things would be resolved or what would happen to the deposit.
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So far, the government has given no details about what it has planned, although it has established the Tenancy Deposit Protection Reform Working Group, to look at how to make this system conducive in the current rental market.
"There have been suggestions that lifetime deposits could be a process managed by third parties and that it could be insurance backed. This is yet to be confirmed though," says Oli Sherlock, director of insurance at Goodlord.
"If this is correct, I would imagine the amount paid would be held in a similar way as it is now, the scheme would be insurance backed, allowing quick payment to landlords. This leaves question marks on how the tenants’ liability is managed when moving from property to property, along with how rental increases would be managed when moving too."
Chris Norris, director of policy and Campaigns of the National Residential Landlords Association mirrors these concerns: "The difficulties would arise if a tenant has a history of poor credit, thereby making it difficult to access an insurance backed or underwritten scheme, or if a former landlord needed to retain part of the first deposit."
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A government white paper on renting is expected later this year so more should be revealed then.
In the meantime, the National Residential Landlords Association has suggested two possible systems: the first is a financial bridging facility, whereby the new landlord is covered by the full deposit even if it is partly in dispute with an existing landlord. This would be possible by a short-term, interest-free loan for the tenant.
The second is a Deposit Builder ISA, which works in a similar way to the Help To Buy ISA, and is a government-protected deposit pot. Neither party would have access to the money unless ordered by an approved deposit scheme or if the account is closed.
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Advantages & disadvantages
The advantages of a lifetime deposit for the tenant are clear: they only need to save up for one deposit and they don’t have to wait for their old landlord to release their deposit before setting up one with their new landlord.
"The disadvantage could be that for a scheme to work there may be additional costs to the tenant," says Robert Burwood, director of lettings at Hudsons Property. For landlords, the scheme is advantageous as they receive a deposit quicker because they don’t need to wait on an existing landlord.
"A possible disadvantage is that the tenant may not have the same level of incentive to care for their rental property if they perceive their deposit is less at risk of proposed damage deductions", flags Robert Burwood.
"The potential for increased complexity and/or risk would be the biggest concern for most landlords," says Norris. He adds that the current deposit system, whereby a deposit is held in an insured or custodial scheme, has worked well for most landlords: "A lifetime deposit would not offer many advantages [for landlords] beyond potentially improving access for a wider range of tenants."
According to Burwood, it is likely that the current deposit system will exist in tandem with the new lifetime deposits: "I see it being an option for tenants rather than a new mandatory requirement."
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