How can deposit replacement schemes benefit agents and their clients?

In recent months, there’s been a notable move in the rental market towards deposit replacement products in place of traditional security deposits. 

This is nothing new - there've been deposit replacement products around for a while, but it appears the number of new products is beginning to have an impact.

A significant reason for several new products entering the market and the considerable coverage they are now getting is due to the incoming tenant fee ban and proposed five-week cap on security deposits. 

Deposit replacement products are going to provide a way for letting agents to earn commission and increase revenue streams in place of charging administration fees to tenants. These new products will also allow then to offer increased protection for landlords with higher levels of cover available.

This does not, however, mean that tenants will be the ones losing out. The outcome could be quite the opposite, actually. There are massive upfront cost savings for tenants and, based on the average rent in the UK, this could equate to over £1,000 on a tenant’s initial moving costs.

For letting agents who accept deposit replacement products, there are greater benefits than simply just making a commission fee when a new product is taken out. 

It will give you a competitive edge over your rivals and will allow you to market properties as ‘no deposit required’, encouraging tenants to your properties over those listed with other agents. It will be particularly attractive – and potentially a deal breaker - to tenants in the case when a rental property is listed with multiple agents.

We’re already seeing agents offering reduced administration fees and other incentives to entice tenants. This movement will be no different and it will save renters thousands of pounds in upfront costs. 

As well as increasing revenue and making your listings more attractive to tenants, a deposit replacement product could also reduce your levels of administration as there’ll be no deposit to register with a deposit protection scheme.

There are likely to be some sceptical landlords out there who won’t initially see the benefits of accepting a tenant who has chosen to take a deposit replacement product instead of paying a traditional deposit. And many landlords’ initial thought will be that they don’t want to accept a tenant that ‘can’t afford a deposit’. In reality, though, it’s nothing to do with being able to afford a deposit. It is more of a question of not wanting to tie-up a large amount of money for an unknown period of time when this could be put to much better use in other places. 

In fact, it actually costs the tenant more in the long-run as they are only paying for a deposit replacement product to defer any costs until the end of the tenancy and won’t receive that money back but still be liable for any dilapidations after moving out. 

By accepting a tenant with a deposit replacement product, the landlord is actually opening up their property to a much larger market and making it more attractive to prospective tenants.

This will, in turn, allow them to let their property faster and also achieve the maximum rent possible. If tenants aren’t required to find a large security deposit, they’ll have more disposable capital to pay that little bit extra each month. 

Most deposit replacement products will cover the landlord as much as a standard security deposit will and with the government looking to cap security deposits to five weeks, deposit replacement products will offer much better protection for landlords.

As well as letting agents and landlords benefitting from accepting a deposit replacement product, tenants will also benefit hugely with large upfront cost savings. 

Most deposit replacement products cost in the region of the equivalent of one week’s rent, although this does differ between suppliers. Based on a £1,000.00 pcm rental, the average product will cost approximately £230 instead of an estimated deposit of £1,385 which will be tied up for the duration of the tenancy.

Also, many tenants move from one rental property to another with a deposit already tied up which will not be returned until after they have moved out and the relevant checks have been carried out. By this time, they will have already moved into their new property and had to get another security deposit together. A lot of the time, this additional deposit is either borrowed or put on a credit card to cover the financial gap between tenancies.

Deposit replacement products have been developed, not for people that can’t afford to pay a security deposit, but to benefit all parties involved. They will help to increase revenues and reduce administration for letting agents, reduce void periods and ensure landlords get maximum rental payments by making their property look more attractive and save tenants huge amounts on their initial move in costs.

*Daniel Leeson is a Director at Blinc UK

To find out more about the Blinc Deposit Replacement Scheme, please visit their dedicated DRS site here.