Deposit Replacement Schemes

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?

We will be answering all of your deposit replacement-related questions right here.

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.

There are a few differences between the two options, but the crucial similarity is that they both provide landlords with protection for any damage, missing items, rent arrears, etc that may occur during a tenancy.

How do Deposit Replacement Schemes Work?

Deposit replacement / zero deposit schemes are similar in some ways 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. 

What are the Differences with a Traditional Deposit?

	Traditional Deposit	Deposit Replacement
Upfront payment from tenant	Refundable payment of up to 5 weeks’ worth of rent for most tenancies in England	Non-refundable payment of usually 1 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 5 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

What are the Benefits for Landlords?

For landlords, deposit replacement schemes potentially offer more cover and less risk.

Many schemes provide more cover than the (up to) five weeks’ worth of rent offered by a traditional cash deposit as they are not limited by the Tenant Fees Act 2019.

It’s also potentially less risky for landlords to opt for a zero deposit option. Landlords with an Assured Shorthold Tenancy must protect a traditional cash deposit with one of the three government-approved deposit schemes within 30 days of receiving the funds and also serve certain specific ‘prescribed information’, or risk potentially large fines.

There’s also much less admin involved as you don’t need to worry about refunding the deposit at the end of the tenancy. Some deposit replacement schemes may also be able to arbitrate and pay out claims faster than traditional deposit schemes, which can be useful for landlords’ cash-flow.

Using deposit replacement also normally 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. 

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 OpenRent advert. This will allow you not only 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.

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