Renters Lose £80m per year to Deposit System

Private renters in England and Wales are missing out on £80 million each year in interest on their tenancy deposits, analysis by Generation Rent and a University College London academic finds out today.

The campaign is calling on the government to reform the current deposit protection system. The outcomes of the reform would ideally be to:

• Make the funds available for building new homes
• Give renters a return on their money whilst it’s locked away
• Enable renters to transfer part of their deposit between tenancies

Dan Wilson Craw, Director of Generation Rent, said:

“Deposit funds are inherently stable so could be put to work properly, not just for the tenants but wider society as well. By adopting our proposals, the government could unlock these funds for investment in new homes and help to bring down rents.”

What happens to interest on tenants’ deposits at the moment?

More than £4 billion of private tenants’ money is protected by just 3 government-accredited schemes, but only 2% of tenants are seeing any of the interest on it. It appears that many landlords and letting agents are helping themselves to these funds. Freedom of Information data obtained by Generation Rent suggests that some agents are using the deposit protection system to effectively borrow money at very cheap rates.

Data from the Ministry of Housing reveals that 59% of deposits are protected by insurance-based schemes, where agents can hold onto the cash for an insurance premium as low as £9.50 per tenancy. The average deposit held is £1,240, meaning interest accrued over the tenancy can make a large profit.

The other 41% of deposits are held by custodial protection schemes, which cost nothing to use but rely on the interest to cover the schemes’ operating costs. The average value of these deposits is £867. The £373 disparity between this figure and the average deposit price (£1,240) suggests that it is lucrative for letting agents to simply insure and hold high-value deposits instead of placing them with a custodial scheme.

Renters Lose £80 million per year to Deposit System

What could the solution be?

In a new report with University College London’s Dr Mike Seiferling, Generation Rent estimates that it costs around £18 million per year to operate the protection schemes. If the deposits accrued interest at 2.5%, the rate on Barclay’s Help to Buy ISA, this would be worth £100m in interest. If you take out the running costs of £18m, it could mean there is £82m that could be passed on to tenants.

Seiferling, who is a lecturer in Public Finance at UCL, said:

“Tenant deposits are tenants’ hard-earned money, yet the protection system appears to treat them like a cheap overdraft for the lettings industry. The system is ripe for change. This money is the closest many tenants have to savings so if it is tucked away for as long as they are renting, it should at least be earning them a decent return.”

How could the system be improved?

Generation Rent proposes the system could be improved by abolishing insurance-based schemes altogether. Instead, Personal Tenant Accounts within the custodial schemes would allow:

• Tenants to transfer deposits to a new tenancy agreement, meaning they wouldn’t need to save for a new deposit before receiving the previous one back
• Reducing the amount of cash that’s necessary to be kept on hand to distribute at the end of tenancies, and invest the remainder in productive parts of the economy
• Landlords and letting agents to reduce the costs they currently incur in protecting their tenants’ deposits – especially as forthcoming Client Money Protection Regulations might limit what they can do with tenants’ cash

In addition to improving conditions for tenants, a large proportion of the deposit fund could be invested. Of the £4 billion protected by the current government-accredited schemes, only £57 million is required in cash at any one times. This leaves £3.96 million to be invested. If this was used to finance new homes, 35,000 could be built in 5 years. By way of comparison, in October 2017, the prime minister announced new funding for 25,000 affordable homes.