Also known as nil deposit or zero deposit schemes, deposit replacement schemes have proven very popular since they have been introduced – but what are they and how do they work?
In this blog post, we will be answering all of your deposit replacement-related questions.
- What is a deposit replacement scheme?
- What are the differences compared to a traditional deposit?
- What are the benefits for landlords?
- What are the benefits for tenants?
- Deposit replacement schemes with OpenRent
Did you know you can offer your tenants a deposit replacement option through Rent Now?
What is a deposit replacement scheme?
A deposit replacement scheme provides an alternative to the usual cash security/tenancy deposit paid by the tenant at the start of the tenancy.
In some ways, deposit replacement/ zero deposit schemes are similar to insurance.
The tenant pays a non-refundable fee at the beginning of the tenancy, and if there aren’t any damages at the end, the scheme will cover the cost – later recovering this amount from the tenant.
While there are a few differences between the two options, their main similarity is that they both provide landlords with protection for any damage, missing items, rent arrears, etc that may occur during a tenancy.
What are the differences compared to a traditional deposit?
| Traditional deposit | Deposit replacement scheme | |
|---|---|---|
| Upfront payment from tenant | Refundable payment of up to five weeks’ worth of rent for most tenancies in England | Non-refundable payment of usually one week’s worth of rent |
| Protected in a deposit scheme? | Yes – must be protected in one of the three government-approved deposit schemes | No |
| Renewal fee? | No | Often yes for tenants (check individual scheme) |
| Refunded to the tenant at the end of the tenancy? | Yes (unless claim made) | No |
| Amount claimable in the event of damages, arrears, etc. | Usually up to the amount initially paid. Landlords can claim for more, but this will likely require legal action | Often greater than five weeks’ worth of rent (check individual scheme for limit) |
| How is the claim paid out? | From the deposit paid (unless claiming more through the courts) | Initially by the scheme, who will seek to recover their costs from the tenant |
| Access to scheme arbitration service in event of dispute? | Yes | Yes |
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What are the benefits for landlords?
Deposit replacement schemes may provide landlords with increased coverage and reduced risk.
Many schemes offer coverage that exceeds the maximum of five weeks’ rent typically provided by traditional cash deposits, as they are not subject to the limitations of the Tenant Fees Act 2019.
Opting for a zero-deposit option may also reduce certain risks for landlords. For landlords with an Assured Shorthold Tenancy (AST), traditional cash deposits must be protected within 30 days of receipt in a government-approved deposit scheme, and specific ‘prescribed information’ must be provided. Failing to comply can result in substantial fines.
Moreover, using deposit replacement schemes may generally involve less admin, as landlords don’t need to manage the refund process at the end of the tenancy. Some of these schemes may also offer arbitration and faster payout for claims compared to traditional deposit schemes.
Plus, using deposit replacement usually doesn’t cost landlords anything.
What are the benefits for tenants?
Deposit replacement schemes fundamentally provide an up-front cash saving for tenants, making it easier for many to afford to rent a home.
At the beginning of the tenancy tenants pay a non-refundable fee usually amounting to the equivalent of one week’s rent. If there are no damages, arrears or other permitted payments due at the end of the tenancy, then there is nothing else for the tenant to pay.
It’s worth noting that many nil deposit schemes charge a renewal fee – this can be either monthly or annually, so tenants should make sure they check before signing up; though the renewal cost is usually much lower than the initial fee.
Tenants should also be aware that if it’s decided that charges are owed at the end of the tenancy, then the scheme will ask them to cover these costs once paid out to the landlord. This could amount to more than the (up to) five weeks’ rent they would have paid for a traditional deposit.
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Deposit replacement schemes with OpenRent
At OpenRent we offer a deposit replacement option with Reposit as part of our Rent Now tenancy creation service.
After talking to all of the major deposit replacement schemes, we chose to work with Reposit because we felt they offered the best overall product for both landlords and tenants.
All tenants that pass comprehensive referencing, or have a guarantor do so in their stead, are eligible to use Reposit.
With Reposit, tenants pay a non-refundable fee equivalent to one week’s rent at the start of the tenancy as well as a small annual renewal fee if the tenancy continues for longer than a year. Landlords then receive cover equivalent to up to 8 weeks’ worth of rent from the scheme.
Using deposit replacement
Landlords need to ensure that tenants can choose whether they would prefer to use a traditional deposit or a deposit replacement.
Deposit replacement schemes are completely legal in themselves, but landlords must give tenants a free choice to comply with the Tenant Fees Act 2019.
If you’re using OpenRent’s Rent Now service, you will have the ability to offer tenants the option of using Reposit (if eligible) when editing the contract.
Tenants will then be able to set up their deposit replacement when making payment for the initial funds due under the tenancy before move-in.
If you’re not using Rent Now, you should speak to your tenants about whether they would like to go for a deposit replacement option and document that they freely chose to use a deposit replacement scheme rather than paying a cash deposit.
If you’re a tenant and you have agreed to rent a property found via OpenRent, you can start the process by clicking Rent Now on the advert.
This will not only allow you to use our deposit replacement option, but also take advantage of all the other features of Rent Now (including secure online contract-signing and handling of funds).
Start the discussion at community.openrent.co.uk