Over 1 million tenants rely on overdrafts to pay rent

Author: Rent Guarantor


Around 13% of tenants in the UK, which is equivalent to around 1.2 million people, use their banking overdraft facilities to pay their rent each month. While the way individuals make use of their overdrafts is personal and specific to them, with new rules about overdraft charging being put in place, this could end up being an expensive way for tenants to pay their rent.

Research from comparethemarket shows that overdraft facilities are used by a number of Britons to pay for things ranging from emergency costs, everyday bills and rent payments. With the cost of renting already high and expected to increase further, for those who do regularly use their overdraft to pay rent, this could put further pressure on their finances.

New overdraft rules

In 2019, the Financial Conduct Authority (FCA) announced new rules relating to the way banks charge their customers for using overdraft facilities. The FCA said it wanted banks to simplify their overdraft charging structures and that from April 2020, banks would no longer be able to:

  • Charge different fees for using an arranged overdraft from an unarranged overdraft.
  • A monthly or daily fee for being in your overdraft.

The FCA also specified that banks must charge a single interest rate on overdraft use.

While it might seem that this option should make it cheaper and simpler for the majority of people to understand how much it costs to use their overdraft, it’s actually expected to result in higher charges for around 8 million people in the UK.

That’s because the majority of banks have set their single overdraft use interest rate at around the 40% mark. While this could work out cheaper for some, for those who might just edge into their overdraft for a few days a month, it could cost more than the small flat monthly fee they were charged previously for using their overdraft.

This means that for up to 1.2 million people who use their overdraft to pay their rent each month, they will end up paying a noticeable amount more in interest, in addition to their rent.

“During the course of life we will all have rainy day moments when we’ll need to use emergency funds. On these occasions, people need pots of money to dip into – a savings nest egg,” said Head of Money at comparethemarket.com, John Crossley. “Relying on overdrafts to fund regular bills, including mortgage or rental payments, can be a costly way of managing household finances.”

Higher rents ahead

Currently, the average monthly rent in the UK is calculated at £886 by Hometrack. And according to recent surveys from the Royal Institution of Chartered Surveyors (RICS) among other, expectations are that rents will rise further this year and next.

The main reason behind the anticipated further rent rises is due to the ongoing imbalance between supply and demand of rental homes across the UK. Surveyors note that interest from new tenants is rising, however, there have been fewer new instructions from landlords and property investors.

Against this backdrop of higher rents and potentially higher overdraft usage charges for tenants, the use of an overdraft to pay some or all of their rent looks set to an increasingly expensive route. However, there are few options for tenants in this situation to ensure they can begin making large payments such as their rent without paying overdraft fees form the bank.