Rental deposit insurance
When renting a home or office, you usually have to put down a rental deposit as security. This comes with drawbacks. Large amounts of money are tied up without yielding a return. On the contrary, they are increasingly plagued with fees. What are the alternatives?
Jürg Zulliger
Up to three months’ rent tied up
By law, landlords are entitled to request up to three months’ rent as a rental deposit (for residential properties, according to Article 257e of the Swiss Code of Obligations). The secured amount can be used at a later stage to settle any tenant damage to the property or outstanding rent arrears. With a monthly rent of 2,000 francs, for example, we’re talking about a hefty sum. It means several thousand francs are tied up without accruing interest.
The trend towards negative interest rates in Switzerland is now also being reflected in this area. An increasing number of banks see rental deposits as an unattractive prospect. There is a growing tendency to charge registration costs, fees, and eventually, maybe even negative interest rates. With a standard account balance, this boils down to a situation where fees are charged and deductions are made, and no interest is paid.
Alternatives to the rental deposit
What alternatives are open to you? There are a range of different rental deposit insurance policies on the market, from institutions such as banks and insurance companies. Tenants do not have to pay a cash deposit; they pay an insurance premium instead. A guarantee is given to the landlord as security. Any legitimate outstanding debts are then settled through this rental deposit insurance. Generally speaking, these include tenant damage and any outstanding rental arrears.
There are entirely logical reasons for doing this. One is obvious: if money’s tight when moving in, the guarantee is a welcome alternative to paying a high security deposit. In practice, as tenants prepare to pay a new deposit, it often happens that their previous one has not yet been released by their former landlord. Things can then get quite tight financially.
Rental deposit insurance: what does it cover?
Strictly speaking, rental deposit insurance is not really insurance. ‘Guarantee’ is a more appropriate term. The insurer simply makes a de facto advance payment. If it is required to make payments, it will then request the same amount back from the tenant. Accordingly, the guarantee is in no way comparable to private liability insurance. All tenants are obliged to take out an appropriate liability policy completely separate to this. This generally carries the financial risk for damage to the property.
Pros and cons
The arguments in favour are essentially as follows:
- It relieves the financial burden on you as a tenant. You don’t have to pay a high cash deposit.
- Large sums aren’t tied up unnecessarily. In the current environment, there is hardly any yield on a rental deposit. By contrast, these accounts are unpopular and beset by heavy fees.
The following drawbacks run counter to these arguments:
- The cost of the guarantee is undeniable: there is a premium of around four to five per cent payable each year, depending on the provider.
- It’s important to remember that the guarantee is only an advance, and not actually insurance for financial liabilities.
It should also be added that the security, in whatever form it may take, must be expressly accepted by the person or organisation in charge of its administration. If you opt for rental deposit insurance, your landlord must give their explicit consent. The same applies in the event of subsequent termination of the contract; the landlord has to give the go-ahead.