What Exactly are Zero Deposit Schemes? A Guide for Tenants and Landlords
by Property Investments UKThe Property Investments UK editorial team have been researching and writing about the UK's property market for more than a decade.
If you’re letting or renting property then you might be considering a zero deposit scheme. Here’s what zero deposit schemes are, and what landlords and tenants need to know about using a zero deposit scheme.
- What is a Zero Deposit Scheme?
- How a Zero Deposit Scheme Works
- Advantages of Zero Deposit Schemes for Tenants
- Disadvantages for Tenants
- Advantages of Zero Deposit Schemes for Landlords
- Disadvantages for Landlords
- Zero Deposit Schemes: A Step-by-Step Guide
- How Much Does a Zero Deposit Scheme Cost?
- Who Offers These Schemes?
- Do I Have to Use a Zero Deposit Scheme?
- Are They Legal?
What is a Zero Deposit Scheme?
In simple terms, a zero deposit scheme is an arrangement which means that when a tenant rents a property they do not need to provide the usual security deposit.
To look at it from the landlord’s viewpoint, it means that when a landlord lets a property they do not request a security deposit from the tenant.
Zero deposit schemes are also sometimes known as no deposit schemes, no deposit options, nil deposit schemes, deposit replacement schemes or deposit replacement insurance.
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How a Zero Deposit Scheme Works
Traditional Security Deposits
Normally when a property is let the tenant must provide a cash deposit. This deposit acts as security should they damage the property or fail to pay the rent.
A tenancy deposit is normally equivalent to five weeks’ rent. The maximum deposit that can be required by law across England, according to the Tenant Fees Act 2019, is five weeks’ rent.
By law tenancy deposits must be lodged with a tenancy deposit protection scheme. Tenancy deposit protection schemes include the Deposit Protection Service, MyDeposits, and the Tenancy Deposit Scheme.
How a Zero Deposit Scheme is Different
When a tenant rents a property then instead of lodging a deposit they pay a fee to a zero deposit scheme provider. In return for this, the scheme provides a guarantee to the landlord. This guarantees that the scheme will pay any sums that become due to the landlord that would normally be covered by a cash deposit.
Advantages of Zero Deposit Schemes for Tenants
Deposit Free Renting
The main advantage of zero deposit schemes for tenants is that they don’t need to save for a cash deposit. The zero deposit scheme will effectively replace the deposit. It reduces the upfront costs of renting.
Zero deposit schemes can be very attractive to tenants. It means they don’t need to wait to save up a deposit. These schemes mean tenants may be able to move sooner than they otherwise would, or move more easily. It means tenants can sign a new tenancy without waiting for the deposit from their last tenancy to be refunded.
Another advantage for tenants is that they can use the money they would normally need for a deposit on other things.
Disadvantages for Tenants
One key issue with zero deposit schemes is that the tenant must pay a fee to use the scheme. Ultimately this makes renting more expensive. Typically a zero deposit scheme fee is equivalent to one week’s rent and there may also be additional fees.
Unlike with a cash tenancy deposit the zero deposit scheme fee is not refunded at the end of the tenancy. Nor can any damage costs be offset against it.
The Tenant Still Remains Liable
It’s also very important to make it clear that a zero deposit scheme does not take away the tenant’s liability to pay for any damage, nor pay their rent, under the tenancy agreement. These schemes do not provide any insurance against paying these costs for the tenant.
It’s highly advisable that tenants using a zero deposit scheme should set some money aside for these costs.
Advantages of Zero Deposit Schemes for Landlords
May Attract More Tenants
The main advantage of a zero deposit scheme for a landlord is that they can let their properties to tenants who do not have the money for a deposit. This might be particularly useful at the moment when the high cost of living means would-be tenants find it hard to save for a deposit.
Landlords who offer a zero deposit scheme might find it easier to find tenants, may receive more tenant applications and may even be able to charge more rent as a result.
Some zero-deposit schemes offer more protection than a normal cash deposit does. Instead of offering five weeks’ of protection as with a cash deposit, these schemes may offer to pay out the equivalent of six, eight or even 12 weeks’ rent.
It may make things easier if there are any problems, damage or unpaid rent at the end of the tenancy. The zero deposit scheme will, or should, pay the landlord quickly and recover their costs from the tenant later.
Zero deposit schemes may also help to speed up the process of letting. There is no need for a landlord to lodge a deposit with a deposit protection scheme, or deal with the admin. that requires nor pay any fees. A tenant can sign a new tenancy without waiting for the deposit from their last tenancy to be refunded. It may reduce void periods in a property.
Disadvantages for Landlords
A downside of zero deposit schemes for landlords is that they do not hold a deposit in cash. They will need to trust either the tenant or the zero deposit scheme to pay out anything they might be owed at the end of the tenancy.
There is a risk that neither the tenant nor the scheme will pay out, or even that the scheme may go out of business.
There is also a risk to the landlord that offering zero-deposit renting could attract tenants who are cash-strapped. If they cannot afford the deposit they may struggle with paying the rent too. They may find it difficult to pay for any damages at the end of the tenancy.
Zero Deposit Schemes: A Step-by-Step Guide
- The landlord or letting agent finds a tenant for the property. They make their usual checks, including reference checks.
- Both the landlord and tenant agree to use a zero deposit scheme instead of a cash deposit.
- The tenancy is signed, the zero deposit scheme paperwork completed and the fee paid. The tenant moves in.
- The tenancy operates completely as normal. The tenant pays the rent as normal.
- At the end of the tenancy, the landlord submits their claim for any damage that has occurred or any unpaid rent. If the tenant does not pay this but does not dispute it, the zero deposit scheme pays the landlord directly.
- If the tenant disputes the landlord’s claim it can be referred to an adjudicator. If the landlord’s claim succeeds, fully or partly, the zero deposit scheme should pay out if the tenant does not.
How Much Does a Zero Deposit Scheme Cost?
Zero deposit schemes typically cost the tenant one week’s rent. For example, if the rent is £1,500 PCM the zero deposit fee would be £375.
Some schemes may charge the tenant a set-up fee on top. This depends on the scheme but maybe around £50. There may also be an annual renewal fee and extra fees to pay in case of disputes.
Zero deposit schemes do not usually cost the landlord anything. (These kinds of zero deposit schemes should not be confused with landlord insurance which covers non-payment of rent and property damage, which the landlord pays a premium for.)
Who Offers These Schemes?
A number of companies offer zero deposit schemes. These include Flatfair, ZeroDeposit and Reposit.
Some letting agents also offer zero deposit schemes to their tenants and landlords. These schemes are usually provided by a third-party supplier. Zero deposit schemes may pay a commission to those letting agents who introduce landlords and tenants to them.
Letting agents who say they offer zero deposit schemes include Your Move, Leaders, Haart, Reeds Rains, Romans, Belvoir and Foxtons.
Do I Have to Use a Zero Deposit Scheme?
No. None of the parties to a tenancy can be compelled to use a zero deposit scheme. Tenants cannot be required to use a zero deposit scheme as a condition of renting a property. This could be a breach of the tenant fees ban introduced by the Tenant Fees Act. Landlords do not have to accept a zero-deposit arrangement
Are They Legal?
Yes, zero deposit schemes are legal. When letting property there is no legal requirement that a deposit has to be paid at all, so it is legal to use a zero deposit scheme rather than a cash deposit.
Things to check when using a zero deposit scheme:
- What the scheme costs, both in initial and ongoing charges.
- Who is providing the zero deposit scheme? For example, a landlord, letting agent or zero deposit company.
- Whether the scheme is insurance backed, ie. underwritten by an insurance company, or not.
- If the scheme provider is regulated by any financial regulator, eg. the Financial Conduct Authority (FCA) to whom any complaints can be referred. (Schemes do not have to be regulated.)
- What support is provided to landlords and tenants, especially in the event of a claim?
- What arrangements there are for dispute resolution? Does the scheme use an independent adjudicator?