“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.

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Leeds is still haunted by its pledge to be the “Motorway City of the Seventies”

Oh, Leeds. Image: mtaylor848/Wikimedia Commons.

As the local tourist board will no doubt tell you, Leeds has much to be proud of: grandiose industrial architecture in the form of faux-Egyptian temples and Italian bell-towers; an enduring cultural legacy as the birthplace of Goth, and… motorways. But stand above the A58(M) – the first “urban motorway”  in the country – and you might struggle to pinpoint its tourist appeal.

Back in the 1970s, though, the city council was sufficiently gripped by the majesty of the motorways to make them a part of its branding. Letters sent from Leeds were stamped with a postmark proudly proclaiming the city's modernity: “Leeds, Motorway City of the Seventies”.

Image: public domain.

During the 1960s, post-war optimism and an appetite for grand civic projects saw the rapid construction of motorways across England. The construction of the M1 began in 1959; it reached Leeds, its final destination, in 1968. By the early 1970s the M62 was sweeping across Pennines, and the M621 loop was constructed to link it to Leeds city centre.

Not content with being the meeting point of two major motorways, Leeds was also the first UK city to construct a motorway through the city centre: the inner ring road, which incorporates the short motorway stretches of the A58(M) and the A64(M). As the council put it in 1971, “Leeds is surging forward into the Seventies”.

The driving force behind Leeds' love of motorways was a mix of civic pride and utopian city planning. Like many industrial cities in the North and Midlands, Leeds experienced a decline in traditional manufacturing during the 1960s. Its position at the centre of two major motorways seemed to offer a brighter future as a dynamic city open for trade, with the infrastructure to match. In response to the expansion of the roads, 1970s council planners also constructed an elevated pedestrian “skywalk” in an attempt to free up space for cars at ground level. Photos of Leeds from that time show a thin, white walkway running through blocky office buildings – perhaps not quite as extensive as the futuristic urban landscape originally envisaged by planners, but certainly a visual break with the past.

Fast forward to 2019 and Leeds’ efforts to become a “Motorway City” seems like a kitsch curiosity from a decade that was not always known for sustainable planning decisions. Leeds’s historic deference to the car has serious consequences in the present: in February 2019, Neville Street – a busy tunnel that cuts under Leeds station – was found to contain the highest levels of NO2 outside London.

City centre planners did at least have the foresight to sink stretches of the inner motorways below street level, leaving pedestrian routes largely undisturbed. Just outside the centre, though, the roads can be more disruptive. Sheepscar Interchange is a bewildering tangle of arterial roads, Armley Gyratory strikes fear into the hearts of learner drivers, and the M621 carves unsympathetically through inner-city areas of South Leeds with pedestrian access restricted to narrow bridges that heighten the sense of a fragmented landscape.

 

Leeds inner ring road in its cutting. Image: author provided.

 

The greatest problem for Yorkshire's “Motorway City” in 2019, however, is not the occasional intimidating junction, but the complete lack of an alternative to car travel. The dire state of public transport in Leeds has already been raised on these pages. In the early 20th century Leeds had one of the most extensive tram networks in the country. The last lines closed in 1959, the same year construction began on the A58m.


The short-sightedness of this decision was already recognised in the 1970s, as traffic began to build. Yet plans for a Leeds Supertram were rejected by successive Conservative and Labour governments unwilling to front the cost, even though smaller cities such as Newcastle and Sheffield were granted funding for light transport systems. Today, Leeds is the largest city in the EU without a mass transit system. As well as creating congestion, the lack of viable public transport options prevents connectivity: the city's bus network is reasonable, but weaker from East to West than North to South. As a non-driver, I've turned down jobs a short drive away that would be a logistical impossibility without a car.

Leeds' early enthusiasm for the motorway was perhaps premature, but there are things we can learn from the 1970s. Whatever else can be said about it, Leeds' city transport strategy was certainly bold – a quality in short supply today, after proposals for the supertram were watered down to a trolleybus system before being scrapped altogether in 2016. Leeds' rapid transformation in the 1960s and 70s, its grandiose visions of skywalks and dual carriageways, were driven by strong local political will. Today, the long-term transport strategy documents on Leeds City Council's website say more about HS2 than the need for a mass transit system within Leeds itself, and the council has been accused of giving up the fight for light rail and trams.

Whilst central government's refusal to grant funds is the greatest obstacle to Leeds' development, the local authority needs to be far more vocal in demanding the transport system the city deserves. Leeds' desire to be the Motorway City of the Seventies might look ludicrous today, but the political drive and utopian optimism that underpinned it does not.