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The $4bn plan to ditch rent bonds: Is it worth the risk?

IT'S the bugbear every renter hates. The thousands of dollars that have to be scratched together every time you move house to cover the rental bond - often before you've got your sticky mitts on the previous bond.

But a radical new plan could see rental bonds become a thing of the past. Instead, renters would purchase "bond cover" that could cost potentially ten times less that a traditional bond, in the process saving thousands.

"Rental bonds are painful for renters and they are painful for landlords. Across Australia $4bn worth of bonds are being held by state governments for years at a time and yet most renters always do the right thing," said Justin Butterworth, whose rental start up Snug is pushing the new bond cover model.

"We believe rental bonds are a tax on renters to pay for the rental system."

However, tenants advocates, while recognising that the rental market is already unaffordable for some, said bond cover effectively sees people fork out an annual fee to access their own cash.

Justin Butterworth of rental start up Snug.
Justin Butterworth of rental start up Snug.

$4BN TIED UP IN BONDS

Around Australia, more than $4bn is tied up in rental bonds, $1.3bn of that in NSW alone. Bonds generally equal one months' rent and are held by state government controlled rental boards until the cessation of the lease.

State governments earn interest on the bonds which is used to pay for support services for tenants including loans for some who can't afford to pay for an upfront bond.

Research by comparison website finder.com.au found people aged under 24 were most at risk of losing all or some of their bond with the top reasons due to unpaid rent or water bills, unpaid fees for breaking the lease early or damage caused to the property.

According to the NSW Rental Board, in 2015-16, the average bond amounted to $1657 and 55 per cent of bonds were returned in full.

But Mr Butterworth told news.com.au that when it came to the dollar amount, it was close to 99 per cent of the total value on bonds that were returned.

"Many people rent for years at a time and we found the default rate was very low; a very large amount of renters do the right thing and Australian renters can be trusted. So why do we have bonds, there must be a better way?"

Bonds in the government's coffers meant less cash in renters' pockets, he said.

"If billions of dollars of renters' capital is being held by the states they are generating interest that is not going to tenants.

"Many renters have student debt, health and life expenses but have thousands of dollars tied up in their bond."

$4bn of renters’ cash is tied up in bonds.
$4bn of renters’ cash is tied up in bonds.

HOW BOND COVER WORKS

Mr Butterworth, an entrepreneur who sold his first start up - an online holiday rental eCommerce marketplace called rentahome - to Stayz in 1999 for $29m, said he was putting some of his own money behind Snug which was also backed by finance giant Insurance Australia Group (IAG) which is underwriting the bond cover.

The cover, he told news.com.au, was, "a logical next step for a bond system that's half a century old".

Rather than shelling out for a bond, renters apply for a bond cover "certificate of guarantee" that is renewed annually. If, at the end of the lease, problems arise, Snug commit to paying out the landlord any money owed for say, cleaning the property. That amount is then claimed from the renter.

Bond cover could cost as little as 5 per cent of a bond, said Mr Butterworth, so renters could have $1900 in their wallet rather than $2000 held by the government.

If a claim arose, the first course of action would be for the landlord or agent and the renter to resolve it. If that didn't work, Snug would make a judgment as to its validity and they'd do it quickly in a little as two days. "We don't need four weeks to work out how much a carpet stain in Surry Hills is worth," said Mr Butterworth, who insisted they would be fair judges on who was at fault.

For disputed amounts under $500, Snug would have the last word, he said, with the renter permitted to present their own evidence.

The Tenants Union of NSW said higher rents meant higher bonds and a higher barrier for people to get into the rental market. Picture: Phil Williams
The Tenants Union of NSW said higher rents meant higher bonds and a higher barrier for people to get into the rental market. Picture: Phil Williams

HIGH BARRIER TO RENTING

Leo Patterson Ross, the senior policy officer at the Tenants Union of NSW agreed renting was becoming more difficult.

"Rents are getting higher and so bonds are getting higher and that means there are very legitimate concerns that the barrier to becoming a tenant is being raised. Most bonds are returned so there's a question mark over what their use is," he told news.com.au.

However, he was sceptical new products aimed at renters, such as bond cover, were better than the current model.

"Bonds ensure you have money set aside and if something does go wrong you don't have to (risk going) through a debt collection agency."

Snug said they would not use collection agents that would impact people's credit ratings.

For Mr Patterson Ross, ditching bonds would have other ramifications. Money that is currently funnelled to tenant support services, including the Tenants Union, could be cut.

And he said the maths didn't stack up for tenants: "They're charging you to keep your own money, and if at the end of the lease there is a problem with the lease you still have to pay for it."

The Tenants Union would prefer more help in terms of Government loans given to those struggling to rustle up a bond.

The legal situation surrounding products like bond cover was also unclear, he said.

Mr Butterworth said the ACT had been the government most enthusiastic about embracing Snug while Queensland's laws were so foggy around the issue they had decided to hold off launching in the Sunshine state.

As well as the ACT, the company has held discussions with state governments in NSW, Victoria, WA and SA.

"We have a legal view it's permissible," he said and claimed 1000 renters had already requested $2 million worth of bond cover.

But Mr Butterworth said it was not a matter of whether new rental products such as bond cover came to the market, but when.

"We're not taking the Uber approach; we're looking for an orderly entry to market with Government support rather than being disruptive," he said.

"Bond cover is good news for rental affordability, and it's a stimulus to the economy with strong consumer benefits."

 

benedict.brook@news.com.au

 

The Tenants Union of NSW said higher rents meant higher bonds and a higher barrier for people to get into the rental market. Picture: Phil Williams
The Tenants Union of NSW said higher rents meant higher bonds and a higher barrier for people to get into the rental market. Picture: Phil Williams


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