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Is tenancy insurance a valid alternative to the six-week deposit?

A new app has been developed to offer an alternative to the refundable six-week tenancy deposit normally required when you rent a home.

Moving home is one of the most stressful and expensive events you can go through, and to add to the misery, many tenants also have to go through the strain of scraping together the six-week deposit and one months’ rent upfront. It is predicted that by 2026 the average deposit in London will be £2733, meaning tenants will have to pay out over £4500 just to move into their home.

But the struggle may be a thing of the past as a new mobile app – InsureStreet – has been developed to offer tenants the option to purchase an insurance policy against potential damage, instead of paying a deposit. So, how does it work, and will tenants and landlords benefit?

How it works

Tenants download the app, enter some details to check if they are eligible for insurance cover and start to build their “RentPassport”, which is an in-app profile stating their requirements, rental history and recommendations from previous landlords. Tenants then browse for properties online and if they find a property they would like to rent, they apply for it through the app.

Meanwhile, the prospective landlord/lettings agent can select how much insurance cover they would like for the property, to a maximum of eight weeks rent or £30,000, whichever is lowest. They then decide if, based on the information available on the RentPassport, they are happy to rent their property to the tenant who has applied.

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Once accepted for the property, tenants can then pay a one-off payment of between 5% and 15% of the deposit total as an insurance premium. The amount they have to pay is determined on a ratings system, calculated by the app based on how long the tenant has been renting, their payment history and if they have any previous landlord recommendations.

Tenants, landlords and lettings agents all have the ability to review and rate each other, as each party has a public profile.

The insurance is under-written by Hiscox.

How much does it cost?

Tenants pay between 5% and 15% of what the deposit would be – the average rent in London is now £1519 per month, with a deposit of £2103. With InsureStreet their premium would be between £105-£315.

This simple table gives an indication of the cost of insurance at various rental price points:

Monthly rental costRefundable deposit (approx.)InsureStreet insurance premium based on a 6-week deposit  (approx.)
£450£623£31-£93
£650£900£45-£135
£750£1040£52-£156
£900£1264£63-£190
£1000£1385£69-££208
£1250£1730£87-£260
£1600£2215£111-£333
£1800£2492£125-£375

 

When deciding to go down the insurance route, it is important to bear in mind that deposits are refundable, provided there is no damage, whereas insurance premiums are not.

Will tenants be better off?

Tenant lobby group Generation Rent have advised that the scheme may be a preferable option for those who would find getting the deposit together a struggle – but if you have funds available, then it may not be the best option.

When you leave the property, provided there is no damage to the property and the rent is fully paid, most tenants see a full return of their deposit. So, if you cause no damage then you may be worse off paying for the insurance.

Another area of potential concern is the RentPassport element of the app – this will include your rental history, including any previous claims on a policy and a rating. Prospective landlords can view this and are able to use the information in deciding who to rent to. This may not be a bad thing if you pay your rent each month and cause no damage – however, some information held will be subjective and as such there are risks involved.

Will landlords be better off?

The Residential Landlord Association (RLA) advise that landlords need to fully check the policy offered to ensure that they are covered for all potential situations – for example if the tenancy continues after the initial agreement period, or damage is caused to the property by visitors.

Landlords should also look into what happens if there is a dispute and how long it might take for approval should the landlord need to make a claim. They should also look into what the rights of appeal are. With a deposit placed in the Tenancy Deposit Scheme landlords have the peace of mind that money has already been paid in – not the case with InsureStreet.

Another thing to consider is the risk of tenants being less likely to keep up to date with their rent or sufficiently maintain the property if there is no risk of loss of their deposit.

Counteracting the risks is the benefit of landlords being able to stipulate the level of cover they need – up to eight weeks of deposit based on the weekly rental charge.

In the current market, renting a property is becoming increasingly expensive and the deposit can prove a barrier to securing a decent property, especially for those on lower incomes. In all, the app gives tenants and landlords more options and choice, potentially offering more financial freedom to tenants and giving landlords better cover should there be any problems with the tenancy. The traditional route may be a better option for those who have the funds available, but each tenant and landlord will have different requirements and the app is well placed to provide an alternative for those who would like one.

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