The Pros and Cons of Zero Deposit Schemes

The Pros and Cons of Zero Deposit Schemes

Hannah McCartan
19th July 2019

Rent your property faster!  Tenants, pay less in upfront costs! Landlords, stay protected! A wave of new ‘zero deposit’ schemes are entering the residential lettings market and promising amazing benefits to landlords, tenants and letting agents. A number of Swansea estate agents have begun to offer them. But are they really as good as they seem?

To date, zero deposits have been marketed quite cleverly to the main stakeholders in the lettings market, and to those who will be hit hardest by the impending tenant fee ban.

The Pros

For Landlords: The tenant fee ban has come into effect in England in recent months. Though landlords can still take a security deposit from tenants, it is capped at the equivalent of 5 weeks’ rent. Zero deposit schemes, or deposit replacement schemes, operate in a loophole and usually offer cover equivalent to 6 weeks’ rent (and some up to 12 weeks’). They’re also free for landlords to use.

At the end of the tenancy, the schemes claim payments for dilapidations will be made swiftly in a ‘matter of days’ where there is a ‘clear deduction to be made’.

For tenants: The premise is simple – a zero deposit scheme is a way of avoiding a high upfront cost. The schemes just ask for the equivalent of one week’s rent to take out the policy (as opposed to the 4-6 week’s generally taken a security deposits). This can be attractive if tenants are moving from a rental property and their current deposit is still tied up.

Not having to wait to save up for a security deposit means tenants might be able to move more quickly.

For letting agents: Schemes pay letting agents commission. This gives the industry a way to recuperate some of the income lost from the tenant fee ban.

Helping tenants move more quickly is in an agent’s interest, and the interests of their clients, too.

Are Zero Deposit Schemes Fair to Tenants?

Zero Deposit Schemes work as a kind of insurance. Tenants pay to take out a policy. Landlords can make claims against the policy at the end of the tenancy. These policies replace the traditional cash security deposit paid at the start of the tenancy.

The Property Ombudsman (TPO) Katrine Sporle is concerned that ‘customers are being mis-sold deposit replacement schemes’.

The Ombudsman is already receiving calls ‘from tenants who believe they have bought an insurance policy that will cover any damage’ continues Jane Erskine, the Deputy Ombudsman. ‘What they don’t realise is that, although the landlord makes the claim, the policy pursues them for the cost’.

The TPO’s Consumer Forum is frequently being asked to look at deposit replacement schemes.

Speaking at the recent TPO conference, Sporle said: “There are the start of murmurings that will get into a crescendo maybe in six or nine months of people saying they simply didn’t understand they were just being required to pay for the privilege of not paying a deposit.”

Pressurised into Policies

One scheme, Reposit, pays between 20-30% commission to agents. Reposit says that without a referral system in place, fewer agents would participate. They state that such schemes must be an option, and not made compulsory.

Generation Rent, however, has received complaints from tenants who have felt pressurised to take out zero deposit policies.

Some schemes allow tenants to pay the cost of the policy over several months, rather than in one lump sum. Georgie Laming of Generation Rent says ‘they [zero deposit schemes] are targeting people who can’t afford deposits upfront. Some are costing people more monthly and not offering very much.’

Regulation & Risk

Peter Savage, spokesperson for Zero Deposit and former ARLA President, says ‘In the deposit replacement sector, it is crucial that landlords are fully aware of the level and consistency of their cover and that tenants fully understand what they are and are not covered for when they buy a deposit replacement product.’

Jon Notley, chief executive of Zero Deposit continues ‘Different levels of regulation exist in the deposit replacement market…with only a few offering Financial Services Compensation Scheme protection if they go bust and some having no authorisation from the Financial Conduct Authority at all.’

End of Tenancy Deductions

Tenants typically remain liable for any damage, or face debt collectors.

If tenants dispute claims made against the zero deposit policy by the landlord, there is no right to free dispute resolution as offered by traditional deposit protection schemes. Zero Deposits claim to use TDS arbiters for mediation, but as TDS invest in Zero deposits it could be argued they are not independent arbitrators.

Some schemes, such as Flatfair, also charge tenants an extra £120.00 to have their case put to arbitration*.

The issue here is that in deposit replacement schemes, there is no physical ‘client money’. Currently, the cash security deposit is legally always the tenant’s money, and therefore the onus is on landlords to make and prove claims. With zero deposit schemes, it is for the tenant to defend against a claim.

As studies have shown tenants are often charged unfairly for wear and tear, this could be a real concern.

With dilapidation costs at the end of a tenancy, a tenant could easily become trapped into a cycle of having to continue taking out zero deposit scheme policies. Racking up bad credit could mean more people find it difficult to rent or buy property.

A Clear Winner

It seems the clear winner with these schemes are landlords, although this idea is widely untested in arbitration so far. Those who come off the worst will be tenants – particularly the low income families the Government claim to be trying to protect.

Whilst landlords and agents provide and facilitate lettings, tenants create the demand.

As it is still an emerging market, there is hope that it will soon be properly regulated to protect those most vulnerable.

Sources: Property Industry Eye / Property Industry Eye / ZeroDeposit.com / The Sunday Times / *Flatfair

Related: Date Set for Renting Homes Act / 100,000 Welsh Landlords Unaccounted For

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