Deposit Replacement Schemes: A Bitesize Guide

Everyone knows to secure a rental property you need to pay a deposit. But what are deposit replacement schemes and why are they becoming increasingly popular throughout the UK? Here we give you the low down on everything you need to know.

What is it?

So instead of paying the upfront standard deposit – renters will pay a scheme provider a non-refundable fee. This is usually rent worth a couple of weeks. Before signing any contracts however, both landlords and tenants should be aware of the fine print. Depending on the scheme – this fee may not be eligible to pay for damages at the end of the tenancy.

New vs. Old

Deposit replacement schemes have arisen out of the need for flexibility as an alternative to the traditional deposit mode, which often relies on significant upfront costs. This option has grown in popularity given the pandemic, especially to avoid situations where renters are due to pay a deposit for their new home before receiving their former deposit – a predicament known as the deposit ‘double-bubble.’

Landlords: The Benefits

There are numerous pros to opting for a deposit replacement scheme option. The schemes offer the same financial protection to the landlord as a traditional deposit; paying the landlord any monies due if the tenant won’t and chasing up the tenant for any due payments. Deposit replacement schemes also remove the risk of fines for failing to protect that deposit in a DPS scheme. As a landlord, you also risk a fine if you don’t return a deposit in time once the tenancy finishes. This way you can avoid the risk of going to court. Scary prospects, we know.

What’s the catch?

Some landlords are, naturally, skeptical. They feel the lack of a traditional deposit means tenants will be less inclined towards properly maintaining the property. Some landlords have expressed the sentiment that: “If my tenant can’t raise a deposit how can I be sure they can pay their rent?!” Property owners must remember however, that tenants still undergo referencing checks – and that these products can be viewed as ‘cash flow’ options for tenants that want to manage their money in a way that better suits them and their personal circumstances.

Tenants: The Benefits

Not having to pay a hefty deposit fee is a viable option if your current personal circumstances don’t allow for it at the time of purchase, or you simply wish to apply that money elsewhere. Some deposit replacement schemes also offer to cover any damages the tenant makes to the property. This means that, as a tenant, you won’t have to pay upfront for damages. You also won’t have to worry about not having your deposit returned to you.

The cons for renters

Some schemes will charge an annual renewal fee, with others charging monthly. This means you may end up paying more over time than with a traditional deposit. Be sure to read over the fine print for any extra costs. You don’t want to end up feeling misled, as in some cases reported by the BBC.

Commenting on the setup, Sean Hooker, Head of Redress at The Property Redress has stated:

“At the Property Redress Scheme, we have unfortunately witnessed many cases of landlords and tenants being mis-sold products within the private rented sector. It is therefore incredibly important that any tenant or landlord signing up for a deposit replacement scheme does their research to ensure that there are no hidden costs, clauses, or surprises in store further down the line. These alternatives only work successfully if all parties understand the purpose and workings of the scheme.

Agents should make sure that tenants are fully informed of all the pros and cons of both traditional deposits and alternative deposit replacement schemes before asking their tenants and landlords to decide what option works best for them. This will ensure that they are fully aware of any potential costs that could crop up at a later stage.”

Read that print!

The debate on whether or not the scheme is beneficial in terms of affordability has also been well documented by Eddie Hooker, CEO of the Hamilton Fraser Group – some of whose in-depth research can be found here.

As with everything, there is nothing wrong with opting for a deposit replacement scheme – as long as you ensure it has been designed correctly. The terms should be transparent – with no room for ambiguity. In a continual landscape of changing financial requirements – it’s a great option to those looking for an alternative route to renting costs.

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