Have you been offered a ‘nil deposit scheme’ from your agent? It’s an offering that is getting people talking. But should you say yes?
Here, we go into detail on the newest trend in deposit products, explaining the possible benefits and dangers of using a deposit replacement product for tenants and landlords.
What Are Deposit Replacement Schemes?
These new products replace upfront tenancy deposits with a product bought by the tenant. They are also known as deposit replacement insurance policies.
Usually costing one week’s rent, the tenant pays the scheme provider, and the provider promises to cover any damages caused by the tenant, up to around 6 weeks’ rent. The scheme then takes on the responsibility (read: risk) of recovering the damage money from the tenant after paying the landlord.
The idea is that tenants who find it hard to pay a large deposit (soon to be capped at 5 weeks’ rent) alongside other move-in costs will have increased access to tenancies. They have the option of paying one week’s rent instead of five, widening their access to rental property.
The landlord still (in theory) has the same level of protection, and the risk of recovering the money is shouldered by the product provider. If there are disputes about the damages, then, at least for the schemes we’ll discuss, the tenant can go through the same dispute resolution as found with the three deposit protection schemes.
The Trade-off: Legal Risk vs ‘Skin in the Game’
Here’s the key trade-off for landlords thinking about agreeing to using one of these schemes.
Using a deposit replacement product means that there is no deposit to register. That means less red tape, less admin and less chance that you will do it wrong. As you will know, not registering a tenancy deposit properly carries a lot of risk.
- Landlords who fail to register the deposit and serve the prescribed deposit information within 30 days can be fined up to three times the amount of the deposit.
- It can also invalidate any Section 21 eviction notices you serve.
- Finally, if you don’t return the deposit with 10 days of the end of the tenancy, you risk being taken to court.
Avoiding all of these risks can make deposit replacements very attractive to many landlords. (But not for OpenRent landlords of course, since Rent Now ensures that your deposit registration duties are performed automatically.)
But here comes the tradeoff.
Some landlords are worried that tenants will think they have no ‘skin in the game’. I.e. they haven’t had to pay money up front, so they will have less incentive to keep the property in good condition.
The scheme providers will chase the tenants for any damages they have to pay for, but the fear is that some tenants will be more likely to take this risk than they would be if they had paid money up front, out of their own pockets. This may make some sense to tenants depending on the product, because as we shall see below, different schemes have different dispute resolution services.
We are not very convinced about this argument. Tenants will understand that their money is still at risk, even if they don’t pay it up front.
In any case, it’s too early to tell. In a year or two, these schemes will have enough data to confidently say if their tenants are higher-risk. But you can bet that they won’t publish that data unless it makes them look good: i.e. unless their tenants are indeed less likely to damage the property.
Tenant Fees Act
The Tenant Fees Act comes into force on 1st June. After this date, any payments that are a condition of the let will be banned except for a holding deposit, tenancy deposit, rent, and a few narrow in-tenancy exceptions.
That means that it will only be legal for landlords to use these replacement products if they are entirely optional, with the alternative being a regular cash tenancy deposit. Landlords wishing to use these products from 1st June will, then, have to be very careful about how they word their availability so it does not come across as being a requirement of the tenancy proceeding.
If you are considering a tenant, they place a holding deposit, and then you reject them because they do not want to use your preferred deposit replacement product, then you will be at real risk. Getting this wrong could lead to fines of £5,000 for the first offence.
You should consider whether this is a risk you are willing to take and if any benefits of using the product are worth the huge potential fines.
Letting agents can receive large rates of commission for selling in deposit replacement services to landlords and tenants during the tenancy creation.
According to research by ARLA research into different schemes, some agents are earning up to 30% of the product’s price (i.e. often over £100) for every sale.
There’s nothing inherently wrong with this and referral fees are a common revenue stream for all kinds of property business, from mortgage brokers to lawyers. It’s just good to know the full picture, and why your agent may be pushing one particular scheme over another, or over a normal tenancy deposit.
Some schemes are newer than others, but here are the ones we’ve heard landlords discussing most often. All the ones in the table below are FCA regulated and FSCS protected.
|Scheme Provider||Max Coverage|| |
|Canopy||Eight weeks’ rent||Hiscox||12% of protected value, plus 10% excess on claims||No|
|Nil Deposit||Six weeks’ rent||Hamilton Fraser Resolution||One week’s rent + VAT, plus £15 per six months||20% of one week’s rent|
|Reposit||Eight weeks’ rent||Independent Adjudication Services||One week’s rent inc. VAT, plus £30 at 12 months, plus £120 if dispute||Up to 30% of fee|
|Zero Deposit||Six weeks’ rent||TDS||One week’s rent, plus £26 at 12 months||Yes, variable.|
Information from ARLA
Let’s look at these schemes a bit closer.
Canopy’s product is called Canopy Deposit Insurance. For tenants, it comes as part of their wider tenant passport product.
Tenants have their rent payments tracked with Canopy, earning them a better credit score (and a ‘Canopy Trust Score’ which landlords may or may not care about).
Tenants pay 12% (plus tax) of the policy value, which can be up to 8 weeks’ rent. That makes it one of the more expensive schemes for tenants. But it has a big bonus; if they experience a ‘life event’ (e.g. unemployment) then they won’t be liable for damages or lost rent. Canopy will pay out for these without chasing the tenant for the money. Although presumably this adversely affects their ‘Canopy Trust Score’…
Not tonnes more to add about Nil Deposit. They are perhaps the worst deal for the tenant, since the fee is one week’s rent, plus VAT, plus six-month topup payments of £15.
In addition, tenants want to use the adjudication service, then they have to pay £240 up front. The £240 must be paid within 14 days of the request for payment (i.e. not necessarily long enough for a tenant to go past payday) and may or not be returned to them depending on the outcome.
Reposit say they are the longest-standing deposit alternative in the UK. Interestingly, they have data that suggests their claim rate is 10 percentage points lower than the cash tenancy deposit claim rate.
If a tenant contests a claim which is awarded wholly in favour of the landlord, they are liable to pay an additional £120, which may put some tenants of engaging with the scheme.
Zero Deposit’s dispute resolution service is provided the the Dispute Service (TDS), which is a familiar name to many landlords. TDS is also used for their Tenancy Deposit Scheme product.
What about the Tenant’s Point of View?
Now that the Tenant Fees Act is in force, the use of any of these schemes must be entirely optional. The schemes cost tenants money that will not be refunded, therefore if they are mandatory, then they would be classified as prohibited payments and the landlord would be liable to pay a fine of £5,000.
So as a tenant, the first thing to know is that you can always say no to these schemes, and if doing so causes the landlord or agent not to let to you, then you should report them for attempting to charge a prohibited payment under the Tenant Fees Act.
Putting this to one side, the main consideration for tenants is that by using these schemes, you are guaranteed to lose money, because there is a fee. With a normal tenancy deposit, there is no fee. They are free. If you do no damage to the property and discharge all your duties as a tenant, then you will receive your full deposit back.
Generation Rent calculates that with some schemes, tenants could be paying over £800 in non-refundable fees for a 12-month tenancy. That’s a lot.
So why would a tenant ever want to use them? The most obvious reason is upfront affordability. Tenants with less readily accessible cash can avoid having to pay up to five weeks’ rent for a tenancy deposit, and instead only need to stump up one week’s rent for the replacement product.
But if affordability is the issue, then tenants must ask whether it is cheaper to pay this fee, or to take out a loan to pay a five weeks’ tenancy deposit. It might be that the interest of the loan adds up to less than replacement product’s fee. In this case, buying the replacement products amounts to being ripped off.
Does OpenRent Use any Deposit Replacement Products or Schemes?
No. OpenRent is not partnered with any deposit-free renting schemes or companies. People not using our tenancy creation service (called Rent Now) are free to use these products if they wish, but we do not think they offer tenants a good deal.
We think that Rent Now provides landlords with many of the benefits of using these schemes, anyway.
It ensures the tenancy deposit is handled correctly, meaning you are already avoiding the regulatory risks without bringing up the ‘skin in the game’ risk. Plus it includes your tenancy agreement and free renewals for just £49!