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A rental bond alternative

From Money Magazine, April 2004

Around 30% of Australian households pay rent rather than own their home. One problem is affording the rental bond. Nicola Field reports on a new alternative.

For many renters an upfront bond equal to as much as six weeks rent is a big ask. In Victoria and the ACT they have a new option – a Rent Power Guarantee. But there’s a price to pay.

In brief

• A rental bond is paid to a landlord or real estate agent at the start of a lease as security for damage or unpaid rent.
  
  
• Using a Rent Power Guarantee (RPG) the tenant pays only 25% of the full bond amount. If the bond on a rental home is $1200, a tenant using an RPG pays just $300 to Rent Power. Vero Insurance guarantees the total value of the bond for the duration of the lease. When the lease expires, the tenant gets just $100 (one third) of their $300 back – assuming the landlord makes no claim on the guarantee.
  
  
• If at the end of the lease the landlord claims the full value of the rental bond, he or she claims this through Vero Insurance, which then seeks repayment from the tenant.
  
  
• Now let’s assume the tenant chooses to use the Rent Power Guarantee, paying $300 to Rent Power and investing the balance of $900 in an online bank account earning 5% interest. At year end, the tenant gets $100 back from Rent Power and has earned $45 interest on the $900. This leaves the tenant with a total of $1045, or $155 worse off than if they had taken the first option of handing over the full bond.

What the experts say

If you have the cash, you are definitely better off following the traditional route of paying the bond upfront. Using the example where the rental bond is $1200, the tenant hands the money over to the landlord and if there is no reason to claim on the bond after one year, gets the full $1200 back.

For the complete story see Money Magazine's April 2004 issue. Subscribe now.