Zero Deposit Schemes - What are they and are they worth it?

Gathering together funds for a deposit on a new rental is expensive for some Tenants, but there are now other options available such as no/zero deposit schemes. However, are they the best way forward? We discuss here:

What is a Zero Deposit Scheme?

Normally, when Tenants move into a private rented property, they pay a traditional, upfront monetary deposit (now capped at 5 or 6 weeks' rent by law since 2019) to the Landlord. This is returned when they move out of the property, if it remains in the same condition (less fair wear and tear - see our other blog posts on this!) If there is damage, the Landlord can take funds from this deposit for repairs.

Finding 5-6 weeks rent can be a lot for some Tenants, so zero deposit schemes were set up to give renters an alternative option. Zero or No Deposit schemes, allow renters to pay less money up front and instead enter into an insurance style agreement with their Landlord.

The terms of the agreement make the Tenant liable for the cash equivalent of between 6 and 12 weeks' rent (considerably more than 5 weeks!)

The Landlord can then claim for any damage to the property; the scheme will pay them and re-bill the Tenant, which can be disputed.

However if Tenant's don't dispute it in time and/or pay straight away, this can have a detrimental impact on their personal circumstances & credit rating, as the deposit schemes can and will use debt recovery services to cover any shortfalls.

So while it seems like a good idea to start with, giving Tenant's less to pay out for initially it may come back to haunt them later.

To be eligible for a no/zero deposit scheme, Tenants need to be referenced and still generally require a guarantor.

Do you have to pay any fees?

Yes - while the initial costs are lower than a traditional tenancy deposit, tenants still pay fees.

To enter into a no/zero deposit scheme, Tenants must make an initial payment, typically equivalent to one week's rent, plus there may be set up and admin fees.

There are no fees for the Landlord, and using a no/zero deposit scheme can mean less admin for them.

It is vital to stress here, that with no/zero deposit schemes, even if the Landlord makes no claims, Tenants will not get any of the money they've paid back.

What are the pros and cons?

Pros:

• Low upfront costs

• Less admin for Landlords, potentially speeding up the move-in process

• For Landlords, they might attract more Tenants because they make it easier for them to start renting = smaller voids!

• Greater financial security for Landlords - a traditional deposit gives you 5-6 weeks coverage whereas some schemes will cover up to 12 weeks rent, giving you more recourse on Tenant damages.

Cons:

• No money back for Tenants, even if the property was left in perfect condition when they leave

• Potential large bill upon move out, if the Landlord makes a claim

• Not always much protection for Landlord's if Tenants end up in rent arrears or if they damage the property. Landlords should always check that potential Tenants can be trusted to pay and take care of their homes.

• It's also worth bearing in mind, that whilst no/zero deposit schemes are legal, they are NOT government approved, unlike traditional deposit schemes.

• Zero deposits are also generally unregulated as a sector, as not all need to adhere with FCA guidelines.

• If Landlord's make a claim, they may have to wait a while for their payout. Depending on circumstances, it could mean Landlords have to cover the cost of repairs up front before being reimbursed later on.

How do you settle disputes?

Before you enter into a zero deposit scheme, its a good idea to check their dispute policy as each scheme is different.

Some providers may charge Tenants a fee for raising a dispute against the Landlord's claim, which can be stressful to deal with and expensive.

What do we think?

As the old saying goes - if it's not broke, don't fix it. Cash will always be king in our eyes here at Heyworth, and doing it the "old" way gives both parties autonomy over their deposit; Landlord's have a tangible amount they can claim against and in most cases, Tenant's will get back what they paid in providing they looked after the Property.

Zero deposit schemes can work in some cases, but like any unregulated financial options (like payday loans) it also opens up vulnerable people to a world of potential debt.