Buy-to-Let Watch: The deposit cap just does not fit

If there’s a risk that can’t be mitigated with a higher deposit thanks to new rules, landlords will stop letting altogether

Risk. It’s one of the most important factors in any business strategy and particularly in the finance sector. Indeed, the regulator and the Government want the industry to pay huge consideration to it.

Following the downturn, lenders were rapped for not managing risk properly. It’s surprising, therefore, that the same attitude isn’t taken towards landlords.

The Government is clearly set on scrapping letting agent fees for tenants, having announced it in last year’s Autumn Statement and confirmed it in the Queen’s Speech last month. However, the draft bill also imposes a cap on security deposits at a maximum of one month’s rent.

It is clear to those operating within the private rental sector that this will in fact disadvantage tenants, and here’s why. Like all businesses, landlords price for risk.

Higher deposits are put in place not because a landlord is being greedy – these deposits are refundable and are kept in an independent scheme – but because they have reason to believe there is a greater risk to this property with this tenant. This can be the case for various reasons, such as if the tenant has pets.

If landlords are unable to protect themselves by charging a higher deposit for tenants deemed high risk, they will stop letting to these tenants. They are not obligated to take on tenants with pets, for example, and, if there’s a risk that can’t be mitigated with a higher deposit thanks to new government rules, they’ll just stop letting to them altogether.

Usual problem

Once again, this is an ill-thought-out policy that fails to recognise the challenges the market faces.

National Landlords Association chief executive Richard Lambert obviously feels the same. Responding to the draft bill, he said: “The decision to cap tenancy deposits at no more than one month’s rent smacks of a political gesture from a government desperate to court the voters who supported its opponents at the last general election.

“We estimate that around 40 per cent of deposits exceed one month’s rent. While capping them may reduce the move-in costs for some, it will increase the temptation for others to view the deposit as the last month’s rent, leaving landlords out of pocket at the end of the tenancy if, for example, the property has been damaged.

“Some landlords use a higher deposit to give them the extra confidence they need when letting to higher-risk tenants, so this could also have the unintended consequence of deterring them from offering their property to those likely to be struggling with affordability in the first place.”

A heavy-handed approach will benefit nobody. We need a proper consultation before it’s too late.

BTL-Watch
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Ying Tan is managing director at Buy to Let Club