‘Ripped off’ renters losing out on £100 a year in savings interest, with cash locked in deposits
Renters who have their money locked away in tenancy deposit schemes are losing out on £100 or more in potential savings interest a year, i analysis has found.
Tenants typically have to pay a deposit before renting a flat or house, which is usually up to five weeks’ worth of rent.
However, analysis by i has shown that, at the end of tenancies, schemes pay out miniscule interest on the locked-away money despite the official rate of interest increasing significantly.
In England and Wales, there are three deposit schemes, none of which pay more than 0.74 per cent on the deposits they hold.
This is despite the best easy-access savings rates on the market currently pay more than 5 per cent. Even in previous years, rates have been far higher – sitting at 4.5 per cent for one-year fixed savings accounts last October.
Millions of renters have money deposited in these schemes, and in total they are losing out on potentially tens of millions of pounds of interest.
Average monthly rent in the UK is £1,190 per month and in some areas costs are far higher – hitting £2,500 per month in London. On a £2,500 rental deposit held for a one year lease, renters would get back around £18.50 in interest at 0.74 per cent, but if they had put it in a leading one-year fixed savings account last October, they would now be receiving £112.50, almost £100 more.
Out of the three schemes, only the DPS responded to requests put to them by i, explaining that it stores tenants’ money in cash savings accounts, many of which are on “multi-year terms,” meaning interest rate increases do not have an immediate impact on the returns it receives.
It also said it had to pay for its services this way, and that it had increased the rate of interest it paid four times in the past four months.
But rental campaigners said tenants were getting “ripped off” and that interest should be “a lot closer” to savings rates available on the market.
There are two different types of deposit scheme in England and Wales – custodial and insured. In custodial schemes the deposit scheme keeps the deposit and pays interest at the end of the tenancy, whereas with an insured scheme, the landlord keeps the deposit. The landlord pays the deposit scheme a fee for this, and has a choice as to whether to pay interest.
There is currently £2bn held in custodial deposit schemes, according to government figures, which would earn over £100m in interest per year if put in a savings account paying 5 per cent.
But at 0.74 per cent, the money it would make would be just £16m.
Jack Yates, of Acorn the Union, which campaigns for better conditions for tenants, said this was “yet another example of tenants being ripped off by the private rental sector.”
“Not only is the cost of a deposit extortionate, but tenants are being hit in the pocket again by the incredibly low interest rates that deposit schemes utilise. Renters’ money accrues significant interest while sitting in deposit schemes and the added value of this money should be spent to benefit tenants or returned directly to the tenant, he said.
Dan Wilson Craw, deputy chief executive of the Generation Rent campaign group, said: “The money you put down as a tenancy deposit is still your money, so any financial return should benefit you. For savings which are effectively locked away for as long as you remain a tenant, you currently get an incredibly bad deal.
He said insurance-based schemes should be scrapped entirely and the interest paid on tenants’ money “should be a lot closer to savings rates in the wider market.”
He said there was also a case for “pooling interest on tenancy deposits” and creating a fund that could then help tenants to take legal action against landlords “who are failing to meet minimum standards.”
A government spokesperson said the protection schemes provided “a valuable free service to tenants”, including dispute resolution.
They added: “Interest earned on custodial deposits is retained by schemes to cover the cost of providing this service, although some schemes do pay interest to tenants at their own discretion. We continue to keep the existing deposit protection systems under review and monitor performance of the existing schemes.”
Each of the three deposit schemes – My Deposits, Deposit Protection Service (DPS) and Tenancy Deposit Scheme (TDS) – did not used to pay interest on rental deposits at all, but now pay a small amount after 14 consecutive base rate rises from the Bank of England upped savings rates generally.
A spokesperson for the DPS said that the deposits placed with partner banks tend to be locked in for “agreed minimum multi-year terms at a rate of interest agreed at the outset.”
They added: “We were the first deposit scheme to pay tenants interest and, over the next 12 months, we expect to pass on £15m of interest to renters. Since we implemented tenant interest payments in May 2023, we’ve committed over £3.1m in interest.”
My Deposits and TDS did not respond to requests for comment.
