Deposit Replacement Schemes Explained

It is often challenging for prospective tenants to find the necessary deposit to secure a property. Even though the Tenant Fees Act 2019 capped deposits at five weeks’ rent, it can still be a considerable sum to gather together. It is no wonder then that the deposit replacement scheme has become a viable alternative for tenants. But how do these schemes work, and should you be relying on them as a landlord?

A deposit replacement scheme, also known as a no-deposit, deposit-free or zero-deposit scheme, or sometimes as deposit replacement insurance, makes accessing the rental market more straightforward for tenants. Generally, rather than tenants having to stump up a deposit in advance, they instead pay a monthly fee to the scheme provider in addition to their rent, or in some cases, a one-off fee which is usually equivalent to a week’s rent.

What are the benefits to landlords of a deposit replacement scheme?

If your tenants are using deposit replacement insurance, then you will usually be provided by the scheme provider with protection against unpaid rent or damage caused by the tenant. The scheme provider in turn then seeks to recover the damage costs or arrears from the tenant, once they’ve paid you out.

Bearing in mind the fact that you can now only ask for a maximum of five week’s rent as a deposit, which removes the safety net that used to be afforded by significantly larger down-payments, the deposit replacement could well outweigh this.

You will, in theory, be afforded the same level of protection as you would with an officially protected deposit placed in one of the government approved deposit protection schemes. In the event of a dispute over damages, the tenant would be able to go through the same dispute resolution process, and you would have the opportunity to present your case to the adjudicator.

The main advantage is that you are enjoying the benefits of the deposit protection scheme, without having to jump through all the setup hoops and risk getting things wrong, which is quite a common occurrence, and mistakes can be costly.

But there are some serious considerations to make if you are going to allow your tenants to go down the deposit replacement scheme route.

What to consider if you’re offering a deposit replacement scheme?

Firstly, you’ll need to consider whether your tenants would be less likely to care for your property if they haven’t had to invest five weeks’ worth of rent upfront at their own expense. Maybe they won’t feel that their own money is at risk.

Secondly, the Tenant Fees Act, which came into force in June 2019, makes any payments that are a condition of the let illegal, other than a holding deposit, a tenancy deposit, rental payments, and a handful of exceptions.

This means you cannot force tenants to use deposit replacement insurance. If you do want to suggest that a deposit replacement scheme is used, then you will have to be extremely careful not to make it appear to be a condition of the tenancy.

Consider this scenario. You are contemplating a tenant. They place a deposit, but you reject them because they won’t sign up for your suggested deposit replacement insurance. The result? You could be fined £5,000. It really is as serious as that.

What is the alternative for tenants?

Some deposit replacement insurance products end up costing tenants a lot more than they would put down in the first place. Is this really a good way to start a long term relationship with renters?

Of course, the schemes make renting more accessible, helping tenants get over that original affordability issue. But if this is the only problem, perhaps tenants would be better off taking a loan to cover the five weeks’ rent down payment, rather than cover the long term fees involved with a deposit replacement scheme?

What is the alternative for landlords?

If ensuring your rental payments are made on time and your tenants don’t get into arrears is your main concern, you may wish to consider rent guarantee insurance, or a rent guarantee scheme. The differences between the two are something we’ve previously explored.

The homes2let guaranteed rent scheme takes care of all your legal responsibilities as a landlord, so you don’t only get to put the worry of being paid to the back of your mind, you can also hand over absolutely everything, from sourcing and referencing tenants to securing the deposit, to preparing the property for rental and handling all the day to day maintenance. All with absolutely no fees or commission involved.

Whilst a deposit replacement scheme may appear an attractive proposition, it is important to consider everything on balance. Depending on your objectives and key concerns, it could be that guaranteed rent is the better option.

To learn more about the homes2let guaranteed rent scheme, you are welcome to get in touch with our team of helpful, knowledgeable experts.