Real cost of borrowing for a deposit

by Property 118

0:01 AM, 3rd January 2020
About 6 months ago

Real cost of borrowing for a deposit

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Real cost of borrowing for a deposit

Research by Hamilton Fraser’s deposit alternative scheme Ome, has looked at the real cost of a tenancy deposit for those that have to borrow the money in order to overcome the initial financial hurdle of renting.

For many, the average tenant deposit cost of £1,299 is manageable but the issue is the requirement to pay the full sum upfront, leading many to turn to family for a loan. But for many more, this isn’t a possibility and so they are forced to borrow the money from a lender and stomach the additional interest on top of the deposit itself.

Ome looked at the additional costs of a credit card, personal loan and payday loan and found that the interest ranged between £44 to £2,794 depending on rate and credit score over a year long term.

Credit card: Using a credit card with a low rate of interest is the most cost-effective way to borrow a rental deposit and at an average rate of 6.4% it would set you back £112 a month to pay back over 12 months, with £44 in interest. A medium rate at an average of 18.9% would set you back £119 a month with £126 paid in interest, while a higher rate at 36.3% would come in at a monthly cost of £128, paying £231 in interest.

Personal loan: If you have a good credit score, a personal loan at a rate 11.4% would cost £115 per month with just £78 in interest, the second most affordable route to borrow a rental deposit.

An average credit score would cost you £118 a month at a rate of 16.7% paying £112 in interest, but a poor credit score would cost around £122 a month, paying £163 in interest. For those with medium to poor credit scores, a credit card, while still fairly expensive, would see you pay less interest in the long run.

Payday loans:

Notorious for their high rates of interest and by far the worst route to go down when borrowing a tenancy deposit but unfortunately the only route for some. Borrowing £1,299 and paying it back over the course of a year would see you hit with a rate of 292%, paying a hefty £341 a month and a huge lump of interest at £2,784.

Co-founder of Ome, Matthew Hooker, commented: “For many tenants, the financial hurdle of a deposit is more of a cash flow problem than an affordability issue and as a result, many are forced to borrow the money in order to secure a rental property.

“This only adds to the financial stress that renting can bring and with rents continuing to climb, not only are tenants paying a large sum to a landlord each month, but also to their lender with the addition of interest. This is particularly testing for those with a poor credit score who have no choice but to borrow with some very high-interest rates and of course, should they borrow for a longer-term, they will also pay more in interest.

“This large upfront obstacle in the way of a tenant deposit is one of the driving reasons we launched Ome in order to address the issue of cash flow for the UK.”



Comments

The Forever Tenant

12:13 PM, 3rd January 2020
About 6 months ago

I don't know how prevalent this is, but my employer offers interest free rental deposit loans that are paid back via your salary. I could see this becoming more common in the future.

Rennie

15:50 PM, 3rd January 2020
About 6 months ago

Reply to the comment left by The Forever Tenant at 03/01/2020 - 12:13
Good to let people know this as is doesn't immediately spring to mind.

SM

18:12 PM, 3rd January 2020
About 6 months ago

Its always a concern to see anyone having to pay interest on a loan. I find having to pay interest on the mortgages of my BTL particulary concerning especially as the Government will not allow me to deduct finance charges against my turnover like every other business is allowed to do. When this taxation policy was introduced many said that it is the poor unfortunate tenant that would suffer as a result of this policy. I would advise all tenants to write to their MPs and point out that the abolition of tax relief on BTL mortgages has forced up their rent just as many industry experts said it would.

Jireh Homes

1:22 AM, 4th January 2020
About 6 months ago

An average deposit of £1299 appears a very high figure, unless from a selective area to support the article on alternative deposit schemes.

Nick Pope

14:21 PM, 4th January 2020
About 6 months ago

Reply to the comment left by The Forever Tenant at 03/01/2020 - 12:13
That's a great idea!


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