“We are missing out on £80m each year”: Why landlords should pay interest on tenants’ deposits

Renters are richer than they think. Image: Getty.

One of the consequences of The Rent Being Too Damn High is that private tenants have barely anything left over at the end of the month to put aside for a rainy day – let alone a home they can own. Last year’s English Housing Survey uncovered the astonishing finding that two thirds of the private renter population have no savings or investments.

Even if you’re fortunate enough to be able to save, the rewards for doing so are pretty meagre. To get a rate as generous as 2.5 per cent, you need to lock your money away for effectively as long as you’re a renter, with Barclays’ Help to Buy ISA (with an extra bonus from the government if you actually buy a house).

But even for most of the 66 per cent without savings, there’s another pot of money that’s held on the same basis but attracts zero interest whatsoever: the tenancy deposit.

Tenants hand over this sum, usually worth between four and six weeks’ rent, at the start of the tenancy to pay for any damage they cause or unpaid rent when they move out. The cash is either held by the landlord or letting agent and insured through a protection scheme, which arbitrates any disputes, for as little as £9.50; or it’s lodged with the scheme itself (known as custodial).

More than £4bn of tenants’ money is protected across the various schemes. Because you have to put down a deposit on a new tenancy before you get your old one back, it means the funds are incredibly stable, and should therefore attract a reasonable interest rate, even after deducting the costs of running the schemes. Yet few tenants see any return: Generation Rent estimates that we are missing out on £80m each year.

When we asked renters if they got interest when their last tenancy ended, just 2 per cent said yes. The government has already recognised this unfairness and asked custodial schemes to start distributing it. They have not – though, to be fair, the government has retained restrictions on how they can invest the money.

The custodial scheme is free for agents and landlords to use. Yet information we obtained through Freedom of Information revealed that most deposits are insured, and the average value of an insured deposit is £1,240: £373 higher than the average of £867 held in custodial schemes. This can only mean that it is somehow lucrative for agents to pay that small insurance premium, in order to hang on to large amounts of cash.


Our survey found that only 2 per cent of tenants whose deposits are insured are entitled by their tenancy agreement to receive interest. In comparison, one in four agents allocate that interest to themselves. Most tenancy agreements appear not to cover this.

Whatever actually happens to tenants’ deposits, the system is set up to give agents access to an incredibly cheap loan, with no benefit to their creditor. If they go bust, indeed, their creditor gets less than no benefit.

This has prompted some firms to set up deposit-free schemes, where the tenant hands over an insurance premium and can keep the rest of the deposit. But with most tenants getting their deposit back in full, they would be losing money by using such a scheme – and tenants with claims against them continue to be liable for damage and rent arrears.

These schemes are simply creating another poverty premium, taking advantage of those tenants with no savings. We don’t need a deposit system that makes money out of tenants: tenants need to make money out of the system.

That’s why Generation Rent is proposing to scrap the insurance schemes completely and reconfigure the custodial schemes so that the tenant, not the landlord, opens the account. When the tenant pays their final month’s rent, an equivalent portion of the deposit would be made available to put down on their next home (the landlord could still make a claim on the remainder once the tenant moves out). If adopted in the forthcoming Tenants’ Fees Bill, this policy could treble the short-term savings that the letting fees ban would create on its own, reducing the need to borrow or raid savings when moving home.

Personal tenant accounts would also make it much easier to distribute interest. And because less cash physically changes hands, less is needed to distribute between tenancies: £57m, we reckon. That leaves the vast bulk of tenants’ money that could be invested. If £4bn went into building community-led housing schemes, we think 35,000 homes could be built over five years.

That would not only give tenants a decent return on their own money, but it would play a role in bringing down rents, making it easier to save properly – or, to generally have nice things.

Dan Wilson Craw is interim director of Generation Rent.

Want more of this stuff? Follow CityMetric on Twitter or Facebook

 
 
 
 

The Tory manifesto promises to both increase AND decrease the rate of housebuilding

Housing secretary Robert Jenrick. Image: Getty.

In his 2014 Mansion House speech, the then-chancellor George Osborne expressed with uncharacteristic honesty the motives at the heart of how the Conservatives see British housing politics: “The British people want our homes to go up in value, but also remain affordable; and we want more homes built, just not next to us.”

Five years later these contradictions remain unreconciled and present in their manifesto, which contains two different and contradictory – but clearly extensively targeted and focus-grouped – sets of policies.

The Conservatives have two housing targets. The first is to make significant progress to hitting “our target of 300,000 houses built a year by the mid-2020s”. The second is their aim to build “at least a million new homes” during the next parliament, which implies a target of 200,000 homes a year. This is not only 100,000 lower than their initial target but also lower than the current rate of housebuilding: 213,660 new homes a year. They have therefore implied at separate points in the same manifesto that they intend to simultaneously increase and decrease the rate of housebuilding.  

There are similar conflicts in their approach to planning. They intend to make the “planning system simpler” while simultaneously aiming to introduce community-led design standards for development and planning obligations to provide infrastructure for the local community.

None of this is unsurprising, The Tories don’t seem to know if they want to build more houses or not – so of course they don’t know whether they wish to make it easier or harder to do so.  

Politicians like obfuscation on housing policy to placate NIMBY voters. Take for example prospective Conservative MP and ‘environmentalist’ Zac Goldsmith’s crusade to save treasured local car parks. The manifesto can equally be accused of pandering to NIMBY instincts, protecting their shire voters from all housing, including ones they might actually need or want, by promising to protect the greenbelt.  

Instead, Conservatives intend to foist development on Labour-leaning inner-city communities and prioritising brownfield development and “urban regeneration”. This requires massive, infeasible increases in proposed density on brownfield sites – and research by Shelter has shown there are simply not enough brownfield sites in cities like London. Consequently, it is not clear how such a policy can co-exist with giving these inner-city communities rights on local design. Perhaps they intend to square that circle through wholesale adoption of YIMBY proposals to let residents on each street opt to pick a design code and the right to turn their two-storey semi-detached suburban houses into a more walkable, prettier street of five-storey terraces or mansion blocks. If so, they have not spelt that out. 

Many complain of NIMBYism at a local level and its toxic effects on housing affordability. But NIMBYism at the national level – central government desire to restrict housebuilding to make house prices rise – is the unspoken elephant in the room. After all, 63 per cent of UK voters are homeowners and price rises caused by a housing shortage are hardly unpopular with them. 


There is anecdotal evidence that protecting or inflating the value of homeowners’ assets is central to Conservative strategy. When George Osborne was criticised for the inflation his help to buy policy caused within the housing market, he allegedly told the Cabinet: “Hopefully we will get a little housing boom, and everyone will be happy as property values go up”. More recently Luke Barratt of Inside Housing noted that most Conservatives he spoke to at the 2018 party conference were scared “they’d be punished by their traditional voters if the values of their homes were to fall”. He was told by a Conservative activist at the conference that, “If you build too many houses, you get a Labour government”.

But the senior figures in the Conservative Party are painfully aware that the continuing housing shortage presents major long-term problems for the Party. As the manifesto itself acknowledges: “For the UK to unleash its potential, young people need the security of knowing that homeownership is within their reach.” Perpetual increases in house prices are incompatible with this goal. The problem has greatly contributed to the Conservatives’ severe unpopularity with a younger generation priced out of decent accommodation. 

Equally, there is increasing evidence that ‘gains’ from rising house prices are disproportionately concentrated in the south of England.  The differences in housing costs between regions greatly reduce labour mobility, suppressing wage growth in the north and midlands, which in turn leads to greater regional inequality. The policy of coddling southern homeowners at the expense of the economic well-being of other regions is a major long-term stumbling block to Conservative desires to make inroads into the ‘red wall’ of Leave-voting labour seats outside the south.

Before dealing with the issue of where housing should go, you must decide whether you want to build enough housing to reduce the housing crisis. On this issue, the Conservative response is, “Perhaps”. In contrast, even though they may not know where to put the necessary housing, the Labour Party at least has a desire in the abstract to deal with the crisis, even if the will to fix it, in reality, remains to be seen. 

Ultimately the Conservative Party seems to want to pay lip service to the housing crisis without stopping the ever-upward march of prices, underpinned by a needless shortage. Osborne’s dilemma – that the will of much of his party’s voter base clashes with the need to provide adequate housing – remains at the heart of Conservative housing policy. The Conservatives continue to hesitate, which is of little comfort to those who suffer because of a needless and immoral housing shortage.

Sam Watling is the director of Brighton Yimby, a group which aims to solve Brighton’s housing crisis while maintaining the character of the Sussex countryside.