Deposit Borrowing for Rental Property Adding Cost

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With the average tenant deposit at £1299, many are forced into deposit borrowing from lenders that adds further cost.

For many, the cost is manageable, but the issue is the requirement to pay the full sum upfront, leading many to turn to family for a loan. But for many more, this isn’t a possibility and so they are forced into deposit borrowing from a lender and stomaching the additional interest on top of the deposit itself. 

Research by Hamilton Fraser’s deposit alternative scheme Ome, has looked at the real cost of a tenancy deposit for those that have to borrow the money in order to overcome the initial financial hurdle of renting.

Credit card

Using a credit card with a low rate of interest is the most cost-effective way to deposit borrowing and at an average rate of 6.4 per cent it would set a tenant back £112 a month to pay back over 12 months, with £44 in interest. 

A medium rate at an average of 18.9 per cent would set the tenant back £119 a month with £126 paid in interest, while a higher rate at 36.3 per cent would come in at a monthly cost of £128, paying £231 in interest.

Personal loan

With a good credit score, a personal loan at a rate 11.4 per cent would cost £115 per month with just £78 in interest, the second most affordable route to deposit borrowing 

An average credit score would cost £118 a month at a rate of 16.7 per cent paying £112 in interest, but a poor credit score would cost around £122 a month, paying £163 in interest. For those with medium to poor credit scores, a credit card, while still fairly expensive, would see a tenant pay less interest in the long run.

Payday loans

Notorious for their high rates of interest and by far the worst route to go down when deposit borrowing, but unfortunately the only route for some. Borrowing £1,299 and paying it back over the course of a year would see a tenant hit with a rate of 292 per cent, paying a hefty £341 a month and a huge lump of interest at £2,784.

Co-founder of Ome, Matthew Hooker, commented: ‘For many tenants, the financial hurdle of a deposit is more of a cash flow problem than an affordability issue and as a result, many are forced to borrow the money in order to secure a rental property.

‘This only adds to the financial stress that renting can bring and with rents continuing to climb, not only are tenants paying a large sum to a landlord each month, but also to their lender with the addition of interest.

‘This is particularly testing for those with a poor credit score who have no choice but to borrow with some very high-interest rates and of course, should they borrow for a longer-term, they will also pay more in interest.’

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