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4 misconceptions
Nov 08 2023

Debunking Four Common Misconceptions About Deposit Replacement Schemes

In recent years , Deposit Replacement Schemes have gained more popularity and have recently been mentioned in the How to Rent Guide. However, there are still many misconceptions about deposits and deposit alternatives. Let’s address a few of them:

Myth 1: Potential damages are covered by cash deposits

An analysis by Reposit of more than 20,000 tenancies revealed that in 14% of cases, tenants owed more than the five weeks’ rent typically covered by cash deposit schemes. This demonstrates that five weeks of protection is insufficient for landlords when unforeseen issues arise. Consequently, Reposit offers 8 weeks of coverage.

Tenants using a deposit alternative remain responsible for end-of-tenancy costs, just like those using traditional cash deposits. The distinction lies in the timing of payment—tenants pay what they owe at the end of the tenancy instead of depositing a potentially excessive sum into a non-interest-bearing account at the start. 56% of these tenancies ended without any charges owed by the tenant, suggesting that cash deposits are often unnecessary.

Myth 2: Cash deposits are more straightforward.

When Reposit, a leading deposit alternative provider, was introduced, it faced skepticism from the market because cash deposits are widely understood. However, cash deposits entail more administrative work for all parties involved. They create compliance burdens and risk for agents and landlords. On the other hand, deposit alternative products may lead to shorter void periods and increased demand for properties due to lower initial upfront costs.

Myth 3: No cost for cash deposits.

This is one of the most significant misconceptions. Cash deposits are believed to be free for tenants, landlords, and agents. However, when considering interest rates, this perception is flawed. With interest rates back over 5% after years at 0%, the £4.5 billion locked up in cash deposit schemes translates to a yearly loss of £200 million. This money does not return to tenants at the end of their tenancy.

Myth 4: A full cash deposit results in better tenants.

Having the full cash deposit upfront does not necessarily guarantee a better tenant. In fact, 30% of tenants have to borrow money to cover their initial deposit costs. In Northern Ireland, the practice of requiring an eight-week cash deposit caused difficulties for tenants seeking affordable housing, leading to a positive change to a one-month deposit requirement to align with the rest of the UK.

Assessing a tenant’s affordability and quality is best achieved through referencing, which is a more robust and fairer method. New technologies, such as open banking, provide a more accurate picture of a tenant’s affordability.

The information in this post is valid to the best of our knowledge on the date of posting. It is advised that you seek independent advice based on your individual circumstances. 

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