A report suggesting that deposits for renting a home should be replaced by a more affordable insurance-backed scheme has been criticised by a tenants’ campaign group.
Think tank the Centre for Policy Studies (CPS) reports that, with the average deposit now £1,041, tenants typically lose more than £300 per tenancy as a result of lost interest and inflation on the cash they put into deposit protection schemes.
The report urges the government to consider an insurance-backed scheme to protect against potential damage or missed rent payments without having to pay an upfront deposit. Insurance would work out at around one week’s rent rather than a deposit, which is typically six weeks’ rent.
The report argues that tenants could also build up a good reputation and ‘no claims bonuses’ similar to motor insurance.
Many tenants struggle to find the deposit for their next property because they have to wait until after they have moved out to receive their deposit from their current landlord. Meanwhile, landlords or their letting agencies will keep any interest accrued.
Robert Colvile, director of the CPS, says an insurance-backed scheme would “rectify an unfair system, which is unpopular with hard-pressed tenants”.
Brian Sturgess, the report’s author, adds that the proposals would resolve “the inherent unfairness of renters losing out on the interest they would have accrued”.
Deposit insurance would introduce ‘poverty premium’
However, while unhappy with the current system, Dan Wilson Craw, director of campaign group Generation Rent, says the new proposals would leave renters worse off.
He says tenants would be poorer under the new scheme because “they get nothing back when they move out”.
Mr Craw points out that if a tenant borrowed the money for a deposit and paid it off over a few months, they would pay less interest than the “poverty premium” they would pay for monthly deposit replacement insurance.
“Instead of introducing a new ‘poverty premium’, we should make the existing system better by finding ways to allow payment by instalments, investing deposits so that tenants get a decent return on their money, and passporting them between tenancies,” he adds.
Generation Rent estimates that 86% of renters get most or all of their deposit back, but only after they’ve already moved into a new home. In March, it proposed that renters should be allowed to transfer part of their deposit to a new home once they've paid the final month’s rent.