fbtrack

Deposit Replacement Schemes Explained

When a property is let, it is pretty standard for the tenant to pay a deposit, which is currently capped at 5 weeks’ rent. This deposit is there to ensure that there are funds to cover should there be any unpaid rent or damages to the property when the tenant moves out. The main issue with deposits, though, is that they add to the financial burden on a tenant at the start of the tenancy and this can make it tough for them financially and also make kitting out the new home difficult. Help is at hand to give the landlord the security of a deposit whilst making it much more affordable for the tenant. This takes the form of the deposit replacement scheme. In this article we will take a closer look at the scheme and its pros and cons.

What are deposit replacement schemes?

In essence they are insurance policies which protect the landlord if a tenant does not pay all the rent that was due or for damages that occur. Basically, the tenant pays an agency a non-refundable fee, typically 1 week’s rent either as a lump sum or in monthly instalments. The agency then insures the landlord for a sum of money which is at least equivalent to 5 weeks’ rent or, in some cases more. This significantly reduces the initial outlay for the tenant, making moving in much more affordable.

What are the pros and cons of Deposit Replacement schemes?

As far as a tenant is concerned there are a few pros and cons:

  • Much lower initial financial burden to move in, making it more affordable and leaving money for any furniture or additions to their new home
  • No need to pay a new deposit on a property after moving out before getting existing deposit back from the previous landlord
  • On the downside, the fee paid is non-refundable, so there is nothing to be re-paid at the end of the tenancy. There might also be annual renewal fees too, so over a longer period the tenant might pay the same as, or more than the initial deposit would have been.
  • The tenant is still liable for paying any late rent or for any damage to the property, whether this be directly to the landlord or back to the agency after they have settled with the landlord.

As far as the landlord is concerned there aren’t too many downsides but there are some considerable upsides:

  • There is less administration around deposits as the landlord does not need to register the deposit with an accredited deposit protection scheme
  • There is a lower likelihood that there will be void periods as it is more affordable for tenants to move in
  • Claims tend to be settled more quickly than through normal deposit schemes
  • Landlord can be protected for more than the capped 5 weeks’ deposit
  • Even when offering a deposit replacement scheme, landlords do have to offer the tenant the choice between the replacement scheme and a traditional deposit, they cannot force the tenant to take out the replacement scheme.

When looking at deposit arrangements both the landlord and the tenant need to weigh up the pros and cons and make sure that, whichever route they choose, it is mutually the best decision.

Book Valuation