Anna Bibby, 29 May 2019
Deposit replacement schemes – otherwise referred to as zero deposit schemes – have become an increasingly popular option for letting agents and landlords alike, in lieu of the traditional security deposit.
They work by charging tenants a non-refundable fee which usually amounts to one week’s rent, as opposed to paying a security deposit upfront. That fee will then be used as an insurance guarantee so landlords can still claim compensation. The purpose of deposit replacement schemes is to assist tenants that may be struggling to fund an upfront deposit while still ensuring that landlords are covered for any damages for their property, making the relationship between tenants and landlords more harmonious.
Since they have been introduced deposit replacement schemes have proven to be popular within the lettings industry, especially with tenants. According to recent research by Your Move, renters are becoming increasingly interested in alternatives to the regular security deposit. Some 50% of the 4000 people said that they would be interested in taking part in a deposit replacement scheme and 70% said that having the choice to pay an upfront deposit scheme would influence their decision on a property.
According to Neil Cobbold, chief operating officer of the lettings payment provider PayProp, the more tenants become aware of deposit replacement schemes, the more that it will become part of their search criteria.
However, the new alternatives to a deposit do not come without their flaws. Although the deposit replacement schemes work out cheaper for tenants in terms of upfront costs, it can actually work out more expensive for them in the long run. As mentioned before, these charges are non-refundable and, where damage does occur, tenants can still be pursued to cover the cost. Whereas standard security deposits are refundable and any damage is deducted from the deposit and a tenant will seldom have to pay extra.
It could also be tricky from a landlord’s perspective. A tenant who is unable to produce an upfront deposit could also could be deemed as a risk for landlords, so they are more likely to avoid a tenant who can only pay through a deposit replacement scheme. Not to mention that these schemes are still in their infancy, so the regulation could have a number of loopholes that haven’t been recognised yet. It’s also worth remembering that security deposits schemes are backed by the government, which will be more reliable in the event of a dispute.
According to Mr. Cobbold, a lot of research by all parties is required before looking into a deposit replacement scheme.
In conclusion, he said: “Whether you’re an agent, landlord or tenant it’s essential to do your research to make sure your aware of the benefits and drawbacks to deposit alternatives. The new choices available can only be a good thing if everyone involved fully understands what they are agreeing to.”
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Anna Bibby, 29 May 2019