Ben Grech: Four myths about deposit replacement schemes, debunked.

Deposit replacement schemes used to be seen as a niche product. But over the last couple of years the tide has been turning. People are starting to pay attention - from the Competition and Markets Authority’s new review, to mentions of replacement schemes for the first time in the How to Rent Guide.

But there’s still a lot that people don’t know or get wrong about deposits, and deposit replacement schemes. Let’s delve into a few of them.  

Myth 1: Cash deposits cover the cost of all potential damages.

At Reposit, we analysed more than 20,000 tenancies and found that in 14% of cases, the tenant owed more than five weeks rent, the amount allowed for by cash deposit schemes. This means five weeks is not enough protection for landlords if things occasionally go wrong, which is why Resposit offers 8 weeks cover. 

Tenants using a deposit alternative remain fully liable for end of tenancy costs, just like cash deposits. The difference is that they pay for what they owe at the end of tenancy rather than paying an arbitrary (often excessive) amount of money at the start of tenancy into a non-interest-bearing account. 

However, 56% ended without any charges owed by the tenant. So what does that mean? That over half the time, cash deposits aren’t necessary. They’re just creating unnecessary friction and burden, with a cost to everyone. 

Myth 2: Cash deposits are easier 

People have paid deposits in cash for years. Why question it? Why change it? When we started Reposit - the leading deposit alternative product provider - we faced scepticism from the market, and I think that’s because cash is cash. Everyone knows what a cash deposit is.

But actually, cash deposits mean more administration for everyone. For agents and landlords, it’s another compliance burden and it’s a risk if you get it wrong. And if using a deposit alternative product, landlords may have lower void periods and even demand for their property, because the initial up-front cost is lower. 

Myth 3: Cash deposits are free.

One of the biggest misconceptions. Cash deposits are supposedly free for the tenant, for the landlord, and for the agent. But take a look at interest rates - after years at 0%, we’re seeing interest rates back over 5%. For £4.5billion locked up in cash deposit schemes, 5% equals £200 million a year lost. That money is not going back in tenants’ pockets at the end of the tenancy.

Myth 4: Full cash deposit = better tenant. 

Having money upfront for a cash deposit doesn’t necessarily make a better tenant. In fact, 30% of tenants have to borrow money for the cost of a deposit in the first instance.

In Northern Ireland, it used to be very common to take an eight week cash deposit, which caused huge friction for tenants trying to access affordable housing.. It’s really positive that this has now been changed to a month to align with the rest of the UK.

What’s really important to establish a tenant’s affordability - and their quality, if you like - is through referencing. Referencing is certainly a more robust, better and fairer way of assessing tenant quality. Plus, new technologies such as open banking give a much better picture of a tenant’s affordability.

Want to hear more? Listen to Goodlord's podcast with Ben Grech: Demystifying tenant deposits, choices, and trends.