Are deposit passports for tenants the future?

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With it recently being revealed that the government is considering ‘deposit passports’ to help tenants save money when moving home, we ask whether this is the future for the rental sector.

More people are now renting than ever before, with the private rented sector the second largest form of tenure in the UK and the largest in London.

All the available evidence points to this growing further in the coming years as home ownership continues to be out of the reach of many, and many others choose to rent for lifestyle reasons.

The growth in the number of people renting has inevitably led to more focus on helping tenants from a financial point of view. Earlier this year, the Tenant Fees Act 2019 was introduced, while the government recently announced it is considering the concept of a deposit passport for use by tenants when they move from one property to another.

What was announced?

In late June, a call for evidence was issued by the Ministry of Housing, Communities and Local Government on tenancy reform, with agents and other interested parties encouraged to submit their suggestions by the early September deadline.

In a statement at the time, MHCLG said: “More than four million people live in the private rented sector, yet when moving home, some tenants can find it a struggle to provide a second deposit to their new landlord – risking falling into debt or becoming trapped in their current home.”

It added: “Ministers are inviting proposals to make it easier for renters to transfer deposits directly between landlords when moving from one property to the next. Freeing up deposits and allowing a renter’s hard-earned cash to follow them from property to property will create a fairer housing market that works for all.”

In a foreword to the 35-page call for evidence document, then-Housing Secretary James Brokenshire – who has since been replaced by Robert Jenrick – said he wanted to look more widely at whether innovative approaches could help tenants move more easily, ‘including allowing tenants to passport their deposit between tenancies’.

He also added that good landlords need to have the confidence to let their properties safe in the knowledge that a deposit will provide them with reasonable protection from damages to their property.

“Any improvements to the way deposits are returned at the end of a tenancy will need to ensure that deposits still serve this purpose and that deposit protection continues to work well for both tenants and landlords,” Brokenshire said.

How would deposit passporting work in practice?

In many cases, tenants have to raise a deposit twice when moving home – with one deposit tied up in the property they are leaving behind, while the second one is required to secure the home they would like to move into.

Tenants who are unable to stump up this ‘second deposit’ upfront could be forced to either borrow the money or miss out on the home altogether.

Landlords can be impacted, too, with tenants sometimes failing to pay their last month’s rent to use it instead as a deposit for their new home.

This is why some back the idea of a deposit passport, by ensuring a tenant’s deposit could follow them from property to property, with the tenant making up any shortfall caused by deductions. The Residential Landlords Association (RLA) put forward the idea of deposit passports as part of its 2017 election manifesto.

Under the proposals, existing deposit schemes could provide a new deposit model to offer this service. The tenant, at the end of each tenancy, would provide their new landlord with a certificate from the deposit scheme. If that was acceptable to the new landlord, it would continue to be held.

At the end of the first tenancy, deductions would be dealt with as they are currently, with the scheme adjudicating on any disputes and the tenant asked to make up the difference.

According to the RLA, the scheme could potentially also allow tenants to save more into their deposit account, enabling them to save a deposit for a larger or more expensive property - or even save money towards a deposit on their first home.

“Deposit passporting could be an effective way of tackling the affordability issues faced by many tenants, particularly those in the capital, where the average deposit is now £1,750,” David Smith, the RLA’s Policy Director, said.

Meanwhile, campaign group Generation Rent said tenants in England and Wales could save almost £800 when moving between rental homes if they were able to ‘passport’ their deposit from one tenancy to another.

Under the group’s plans, tenants would be able to transfer some of their deposit to a new tenancy once they’ve paid the final month’s rent on their current home, helping them avoid having to borrow money to cover a new deposit.

Tracey Hanbury