Deposit replacement schemes – a new path forward or a pitfall to avoid?
If you have rented before, you will know that a deposit will be payable for most tenancies to cover unpaid rent or any damage that might be incurred at the property; the amount that can be taken was limited to 5 weeks’ rent in 2019. Many agents are now recommending to landlords and tenants that a new financial services product be used in place of the traditional deposit – a deposit replacement scheme or ‘zero deposit guarantee’. These benefit landlords as they provide for six weeks of protection as before the deposit cap. As with traditional deposits, they rely on adjudication schemes to resolve any disputes.
The concept of these is that, instead of paying a lump sum deposit to an agent to be protected with one of the registered schemes (TDS, DPS, MyDeposits), a smaller premium – usually 1 week’s rent – is paid by the tenant to an independent company who provide protection to the landlord in the case of a breach of tenancy. This, in theory, means tenants who do not have that cash to hand are more able to access the rental market, without having to save or borrow.
These schemes sound great on paper but it is important to make sure that you have the full details of the scheme before committing to it. Recently, there have been reports of tenants being mis-sold deposit replacement products so it is important that you know what to look for if this becomes a consideration.
What you need to know.
- Lettings agents/landlords must always provide you with a choice to pay a regular deposit instead of a deposit protection scheme (although they do not have to offer a deposit protection scheme at all)
- The one week’s rent that you (the tenant) pay is non-refundable. This means that you have to find a smaller amount at the start, but will never get this money back. With a traditional deposit you get all of it back if there are no deductions to be made.
- You (the tenant) will still be due to pay for any damages or unpaid rent under your tenancy agreement. To be clear, you still pay for any issues at the end of the tenancy as well as the initial payment fee. Instead of the landlord pursuing a claim, the scheme provider will pursue this directly with you instead.
- It is important to be aware of all charges associated with the scheme. Some schemes involve a monthly payment or a yearly renewal fee for the tenant on top of the initial payment so make sure you read all the terms.
- Also be aware that agents are paid commission by the zero deposit provider for introducing tenants to them. The popularity with agents of these schemes has risen with the abolition of tenant fees – they provide an additional source of income, as well as avoiding the costs of registering a deposit with TDS, DPS or MyDeposits, and reducing agents’ workloads. Make sure a zero deposit scheme really is in your best interests.
So what scheme should I choose – replacement or traditional?
The primary benefit of a deposit replacement scheme is avoiding the large upfront payment. While this may be an appealing prospect to some, it is important to understand that there are additional costs associated with these schemes that are not found in a traditional deposit scheme. Alongside the upfront payment for a deposit replacement scheme, you are still liable for any and all deductions made at the end of your tenancy so there is no long-term benefit to these schemes; in fact the cost is likely to be greater than a traditional scheme. Using a custodial or insured deposit scheme has no fee at all to the tenant and the tenant will only ever have to pay for deductions agreed at the end of the tenancy.
If you are in the position to afford a traditional deposit scheme, Bright Properties would highly recommend this as the long-term cost benefit is significant. If you do choose to use a replacement scheme, ensure that you read their terms and conditions thoroughly and understand your obligations. In our experience, through using the custodial scheme with TDS, money is held separately, kept secure and dealt with in a transparent manner. The vast majority of our tenants pay their rent and look after their home so receive their full deposit back. If you would like to find out more, get in touch.