Real cost of borrowing for a deposit

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.

For many, the average tenant deposit cost of £1,299 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 to borrow the money from a lender and stomach the additional interest on top of the deposit itself.

Ome looked at the additional costs of a credit card, personal loan and payday loan and found that the interest ranged between £44 to £2,794 depending on rate and credit score over a year long term.

Credit card: Using a credit card with a low rate of interest is the most cost-effective way to borrow a rental deposit and at an average rate of 6.4% it would set you back £112 a month to pay back over 12 months, with £44 in interest. A medium rate at an average of 18.9% would set you back £119 a month with £126 paid in interest, while a higher rate at 36.3% would come in at a monthly cost of £128, paying £231 in interest.

Personal loan: If you have a good credit score, a personal loan at a rate 11.4% would cost £115 per month with just £78 in interest, the second most affordable route to borrow a rental deposit.

An average credit score would cost you £118 a month at a rate of 16.7% 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 you 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 borrowing a tenancy deposit but unfortunately the only route for some. Borrowing £1,299 and paying it back over the course of a year would see you hit with a rate of 292%, 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.

“This large upfront obstacle in the way of a tenant deposit is one of the driving reasons we launched Ome in order to address the issue of cash flow for the UK.”

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