Can deposit replacements ever be a win-win for landlords and tenants?

Can deposit replacements ever be a win-win for landlords and tenants?

9:29 AM, 11th August 2021, About 3 years ago 6

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While the cost of renting continues to increase across the UK, the Government continues to grapple with the issue of making renting more accessible and secure, especially for the more vulnerable in our society. The Renters Reform Bill, announced in the 2019 Queen’s Speech and reaffirmed by the Government in May 2021 will, amongst other initiatives, look to introduce the concept of a ‘lifetime deposit’ to try and deal with the end of tenancy ‘deposit overlap’, whereby many tenants must find a new deposit for a new tenancy before the old one is released by the landlord, agent or authorised deposit scheme.

Details are currently sparce as to what this ‘lifetime deposit’ will actually look like and what it means for landlords and renters, but the slowly growing deposit replacement market will surely be looking at these changes as a chance to capitalise on one of their core USPs; deposit replacements already deal with the end of tenancy overlap as no physical cash is involved.

While the debate in the UK rages as to whether deposit replacements are a good thing or not, elsewhere in the world deposit replacement products are already gaining traction. In the US, companies such as Rhino  have taken the rental market by storm with more than 1.2m renters now enjoying deposit free renting and the number is growing month on month. Some states are now progressing plans to actively legislate for landlords to offer deposit replacements alongside cash deposits, or in some cases as the primary option.

Others are following suit. Leap have recently announced the launch of their services in Australia, looking to assist the country’s rental community following the lifting of eviction moratoriums and a scarcity of affordable homes in highly populated cities. In Germany, companies such as Ocyan and Kautionsfrei are well established and other European countries are starting to launch their own versions.

The common thread to all these deposit replacements companies is their commitment to make deposit free renting look and feel the same as using a traditional deposit. In other words, they provide the same protection and security to both landlords and tenants as they would get if they opted to use a traditional deposit. Deposit caps differ from country to country, ranging from one month’s rent equivalent up to three months. If a tenant has to find a £1,000 cash deposit, then the deposit alternative provides £1,000 protection to the landlord. There is none of this ‘increased coverage’ that benefits the landlord but actually penalises the tenant who is paying for the product.

Another constituent feature of all the above-mentioned products is the ability to pay for the deposit replacement monthly rather than upfront, thereby providing an even more affordable option as well as mirroring the behaviours of monthly rental and utility bill payments. This also means tenants only pay for the length of their stay, rather than a yearly or two-yearly product that may not suit the tenant’s needs. Product literature is transparent, making it explicit that the tenant is always liable for damages and missed rent/bill payments rather than terminology and soundbites that make the tenant think they are purchasing an insurance product that covers their responsibility to pay.

While the UK also has its fair splattering of deposit replacement, currently only one company, Ome,  offers both a monthly payment model as well as capping the protection to the landlord at the same level that would be provided by a traditional deposit i.e. five or six weeks depending on the annual rental amount. Launched in 2020 and operated by Hamilton Fraser, the people behind the government authorised tenancy deposit protection scheme mydeposits and Client Money Protect , the mission is to offer real choice to the tenant while providing the same protection to the landlord as if they had taken a traditional deposit.

Eddie Hooker, CEO of Hamilton Fraser, comments: “tenants should only have one decision to make when it comes to security deposits – do I pay a traditional deposit or do I opt for a deposit replacement product? They shouldn’t have to worry that a replacement product that they are paying for benefits the landlord more than if they paid a cash deposit. They should also feel comfortable that, should they owe the landlord for damages or unpaid bills at the end of the tenancy, the deposit replacement company will treat them fairly and deal with the dispute in the same way that a deposit protection scheme operates. They want to know that their provider has a deep knowledge of the private rented sector and dispute management. Ome deals with these challenges whilst offering a simple monthly payment model for the duration of the tenancy (starting from just £5 per month), and dispute repayment plans should there be monies owed at the end. This is all backed by a business that has been operating in the sector for more than 25 years.”

Already the deposit replacement product of choice by some of the UK’s largest student rental businesses, Ome also offers the option for tenants to unlock their current deposit with the landlord’s agreement. This feature helps both the landlord and the tenant by dealing with some of the smaller rent arrear issues caused by the ongoing COVID pandemic and other short term employment gaps. And of course, because there is no physical cash deposit to pay, tenants have the complete freedom to move home without the fear of the ‘second deposit problem’ caused by traditional deposit protection.

By looking further afield and learning from the behaviours and practices of other established rental markets, deposit replacements can evolve in the UK and become a real option for many of the UK’s renters. By choosing the right deposit replacement product, landlords in turn can rest assured that they continue to be afforded the same protection and support as if they took a cash deposit, but without the regulatory hassle that goes with it.  A win-win for both landlords and tenants.

Contact Landlord Action

Specialists in tenant eviction and debt collection. Regulated by The Law Society.

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The Forever Tenant

9:59 AM, 11th August 2021, About 3 years ago

Speaking as a tenant, I will actively avoid a deposit replacement scheme.

Other than no longer needing to pay the entire deposit up front, I don't see any other benefit on the side of the tenant.

Effectively, what I am doing is paying a company to give them the authority to come after me legally. Any money I contribute to them is lost. If I am a perfect tenant, then I would lose nothing. So far in 25 years of renting I have lost £250 in deposit and that was mostly me feeling guilty about the garden getting overgrown.

So if someone can tell me why paying a monthly or annual subscription would be better, I am all ears.

Finally, I do have a suspicion that these may get mis-sold to tenants by tenancy agencies, causing a repayment situation similar to the PPI situation a few years back.

Reluctant Landlord

10:31 AM, 11th August 2021, About 3 years ago

I can see nothing but more hassle for the Landlord too following on from the above post..
The idea of then being drawn into another contract with another agency/company where there will be more risk to me than just accepting the one off payment of a deposit does not appeal. If it is paid, its done. I can then serve everything in one hit to the tenant.
What about the issue of all the other legal stuff that is required - the Prescribed info as just one example - do you serve that after the first months payment towards the deposit or do you have to keep doing that every month until the full deposit is paid or at the end?
Any what if the tenant stops paying? (for whatever reason) or want to leave the property before the full 5 week deposit has actually been taken? If there is major damage can I only recoup what the tenant has paid in to date? I fear in addition to the actual deposit money being paid in, I then have to go through an other avenue to get the rest up to the 5 week cap from the company running the scheme.
No thanks!
The amount of paperwork and anti LL legislation is bad enough.
This just adds another layer of complexity to a situation that is not needed! If it ain't broke, leave well alone. There are plenty of other options a tenant can get a deposit if needed, so why make the LL party to a process that is up to a tenant to sort out?


11:21 AM, 11th August 2021, About 3 years ago

Reply to the comment left by The Forever Tenant at 11/08/2021 - 09:59
I can't see these working for landlords either.

I've had a number of tenants where they've done substantial damage, even though the property was in good order when they've moved in plus an expectation that it would be looked after, and rather than 'fessing up to it they've tried to hide it. Whether they are trying to hide it to save embarrassment or save money I don't makes no difference, as a landlord you shouldn't have to pay for wanton or careless damage.

Those experiences have taught me not to agree to release the deposit until I've had the property back at least a couple of days and therefore had a chance to find what they've done. Even in this article there are a lot of words telling you how hard it is for tenants and that these things work elsewhere but there is never any detail telling you *how* they work to protect you as a landlord.

If the *how* is that the scheme guarantees the landlord up to a certain amount and the landlord gets his or her money then the scheme goes after the tenant, then yes, there will be some tenants who will be pursued. It will replace one problem with another.

The best option is just be a good tenant...'fess up when something gets broken. And just be a good landlord..if it's minor wear and tear and something that can just be dealt with quickly as you turn the property around between tenants then it's not worth bothering about. If it takes extra days of work then you need to be protected and remunerated. You are never going to know until you've had the property back for long enough to do a thorough check.

Monty Bodkin

11:41 AM, 11th August 2021, About 3 years ago

"Can deposit replacements ever be a win-win for landlords and tenants?"

There is only one winner here and it is not landlords or tenants.


13:15 PM, 11th August 2021, About 3 years ago

Reply to the comment left by Monty Bodkin at 11/08/2021 - 11:41
Back in the days when we had high interest rates some insurance companies (which is in effect what a deposit scheme is) didn't make their money on the insurance charges, but by investing the cash they were holding from customers and not having to pay out. We are now at a time of low interest rates but basically if we are talking "lifetime deposits" from tenants then that's just giving a financial services company a big chunk of cash. So the business model will be (1) invest it (2) levy fees on the deposits (3) try not to pay out to landlords. Or it will be some combination of that.

At the moment interest rates are low so as long as a tenant looks after the property and doesn't abuse it then with a good landlord they don't lose much. It's just there to facilitate them having a home.

Dylan Morris

15:51 PM, 11th August 2021, About 3 years ago

You have to ask what kind of tenant you’re dealing with when they can’t save up a few hundred pounds for the deposit, even if they are renting currently. Shows they’ve no capacity to save and will have no extra money should they have any emergencies which will lead to the rent being unpaid.
I know from my own experience this year. Tenant moved into my rental property early Jan this year. Been renting for 4 years previous. No money for deposit it was being paid as a gift from his mother. Guess what ? Only paid two months rent since moving in and now 5 months in arrears and I’ve recently had to issue a Section 8 notice. I went against my golden rule that the tenant must have the deposit from their own resources with some evidence of savings. Never again.

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