While the cost to set up a new tenancy is far lower than buying a property, recent research found 1 in 5 tenants are getting into debt to pay for a deposit. The findings were the result of a survey by Reposit, who questioned 1,000 current renters from all age brackets in each UK region.
The most popular amount of cash for tenants to secure was between £500 and £1,000 (24%), followed by between £1,000 and £1,500 (18%) and £1,500 or more (6%). The methods used to secure the cash included borrowing from friends and family, credit cards, personal loans and overdrafts.
If you are thinking of renting a property, you may be wondering what the cost of a deposit might be and how you can pay that sum. We’ve answered the most common questions on paying a rental deposit below:
Q. How much can a landlord charge as a deposit?
A. Unlike buying a property, when a deposit is usually a percentage of the property price – typically 10% or 20% - a tenancy deposit is calculated using the value of the rent. The Tenant Fees Act 2019 limits what landlords can charge. The maximum tenancy deposit is capped at five weeks' rent for properties with an annual rent under £50,000, or six weeks' rent for properties with an annual rent in excess of £50,000.
Q. How much might I need to save?
A. The latest Rental Index published by Zoopla found the UK’s average rent was £1,284 per month. Using this figure, a tenant can expect to be charged around £1,470 for a deposit, which is equal to 5 weeks’ rent at the national average.
Q. How do I pay the deposit?
A. Cash – as in notes and coins physically handed over - is not king when it comes to paying your tenancy deposit. The industry standard is for renters to pay using a debit card or by bank transfer. It may also be possible to pay with a credit card but this method may incur a processing fee, so bear this in mind. Paying by card or transferring money leaves a secure digital trail for everyone involved.
Q. Should I get a loan to cover the deposit?
A. Any type of loan provided by a bank, building society or credit lender creates a debt. Renters who borrow money in advance of their rental application may risk harming their prospects, as the debt may show up on their credit score or reveal itself on bank statements.
If you borrow money from family or friends, you are still in debt but it is a more informal arrangement and less likely to affect a tenancy application. It is still wise, however, to have a written agreement that states whether the loan should be repaid, whether interest will be applied and when the amount should be repaid by.
Q. How can I avoid getting into debt?
A. It is stating the obvious but paying a deposit with money saved is the best way to avoid debt. Saving ahead of time using a high interest rate account should help you avoid debt and save more cash in a quicker time frame.
If you haven’t got instant access to the deposit amount, avoid short-term loans as these usually carry the highest interest rate. Instead, consider a 0% interest credit card and pay off the balance before the interest-free period ends.
If you’re considering going into your overdraft to pay the deposit, talk to your bank or building society. Some offer interest-free overdraft periods, while others will charge for every day the account is overdrawn. If charges apply, you should prioritise clearing the overdraft before interest builds.
We’re here to offer as much help and advice as you need before renting a property. Please get in touch if you need assistance.
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