The pros and cons of higher and lower deposits

CPS Homes properties let within 4 days boardsWe recently asked whether security deposits are quickly becoming a thing of the past.

University halls don’t ask for one at all, most purpose-built student accommodation blocks want just £100, whereas private landlords usually ask for the equivalent of a month’s rent, so we thought we’d weigh up the pros and cons of the different deposit offerings.

A full deposit

Typically the equivalent of a month’s rent; sometimes more.

Positives: Regarded as the traditional way of doing things, the most obvious reason for taking a full deposit is to guard against a tenant failing to pay their last month’s rent, with the bit extra helping cover any cleaning or minor damages. As a landlord, you’re very much covered and only an exceptional case would see you wanting to claim for in excess of the deposit.

Negatives: It’s expensive for tenants, especially students, as they’ll often need to pay a deposit on a new property before they’ve got their current one back. More and more tenants seem to be opting for brand-new, modern purpose-built student accommodation because they ask for only a small deposit; typically £100.

Since deposit protection was introduced over a decade ago, the occasional tenant mindset of “you’ve got my deposit, so I won’t pay the last month” has disappeared, making the traditional “a deposit should be at least a month’s rent” theory looks arbitrary.

When there is a claim to be made, it only tends to be for a couple of hours’ cleaning and/or the occasional painted wall, so there is certainly a “do I really need to ask for all this money?” consideration to be had, especially in today’s overcrowded market. 

A lower deposit

Approx £100-£150 per tenant

Positives: On average, deposit claims amount to about £75 per tenant, so taking a lower deposit shouldn’t be regarded as risky. Additionally, we’ve proven that asking for a lower deposit sees interest amongst prospective tenants increase sharply, which – in a fiercely competitive market – is priceless. Not only that, but because tenants are paying less upfront, landlords have successfully been able to ask for more rent over the course of the tenancy; which means extra funds in their pocket for good, rather funds taken, held and then returned to the tenant.

Negatives: Of course, in the unlikely event there is a catastrophe, a deposit of this amount is unlikely to cover it, but that’s what guarantors (if applicable) and the courts are there for. Yes, it’s effort and hassle to go down this route, but it’s arguably no different to the type of case landlords currently have to compile and present to deposit protection scheme if their deposit claim is disputed by the tenant. Those who have been through the Alternative Dispute Resolution (ADR) process will know how arduous and incredibly difficult it is to win a claim.

We’re yet to see if smaller deposits discourage tenants from leaving a property in good condition, but with guarantors in place (where applicable) and several pre-tenancy end prompts from us on what to do to ensure they get their full deposit back, we don’t anticipate much of a difference.

No deposit

Positives: What’s important to point out here is that a deposit is still taken, essentially; it’s just not labelled ‘a deposit’. Instead, it’s built into the rent.

As we said earlier, asking for a lower deposit (in this case nothing) can see the rent increase, so landlords are effectively taking the deposit over the course of the tenancy through the increased rent, rather than at the start as is the norm.

It makes the property more desirable and easier to let, especially when used as a marketing tactic. “Move in for free” is a huge attraction to prospective tenants – particularly if there’s an agent piling all its resources into a huge marketing campaign for it – and will ensure the property stands head and shoulders above its competitors.

In student properties, rather than ask for two summer retainer months where half-rent is payable, we’ve known landlords ask for one half-month and one full-month, so they’re getting their deposit that way. There’s also no protection or return to be worrying about.

Negatives: There’s no getting away from the fact landlords will have to cover any costs that would typically be claimed from the deposit, but as we’ve said above, it shouldn’t be viewed like that. Landlords have, in effect, had the deposit paid to them via the rent, so they’re simply using some (rarely all) of that figure towards the required remedial work.

Finally, have you heard about the alternative, ‘zero deposit’ insurance-type schemes?

Instead of taking a traditional deposit, a few agents are using ‘zero deposit’-type schemes that charge tenants a one-off premium – typically a week’s rental payment – and buys the landlord a type of insurance that will cover any end of tenancy costs.

These schemes say they’re making renting affordable, but critics argue that, after paying the initial insurance premium, tenants could be left having to fork out again if the landlord claims on it. The upfront payment is money they’ll never see again, whereas they would get a standard deposit back if they take care of the property.

For landlords, they still have to prove their claim is valid – often to the same adjudicators appointed by deposit protection schemes – and it’s unclear how long claims would take to be paid, not to mention what would happen if a scheme went bust.

13 September 2019


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