DEPOSIT REPLACEMENT SCHEMES
What are deposit replacement schemes?
Deposit replacement schemes offer tenants flexibility and transparency and they come in lots of different formats. The common theme is that they replace the one-off lump sum deposit with a replacement product, meaning that the tenant pays by a non-refundable fee instead.
The schemes guarantee the same protection to the landlord as a traditional deposit; still paying the landlord rental payments if needed and chasing the tenant for the money afterwards. Some schemes act as insurance whilst others offer a membership, in which the scheme ensures itself against any liabilities it has to pay.
Deposit replacement schemes mean that landlords’ have no need to register the deposit and therefore can remove the risk of fines for failing to protect a deposit.
What do landlords think to these schemes?
Some landlords are very unsure of these schemes, and have the fear that having no physical deposit paid can encourage more bad behaviour from the tenant and that they could feel they have less reason to adhere to their obligations within the tenancy agreement – landlords, therefore, feel they are at a higher risk.
Why would a tenant use a deposit replacement scheme?
There are a number of reasons a tenant may want to use such a scheme instead of a standard deposit:
- The flexibility of the schemes helps to support positive cash flow.
- Deposit replacement schemes also mean that no physical money is tied up in a custodial tenancy deposit scheme or held by the landlord or agent.
Deposit replacements have slowly started to become more popular over the last few years, with well-known industry names joining several schemes. The additional competition has increased the expectations of customer service within the schemes, however, there have also been several ‘in-house’ deposit replacements developed by larger agents.
What are the risks of the ‘do-it-yourself’ option?
A ‘do-it-yourself’ scheme is a replacement option offered and operated by the agents. There have been a number of tenants reported in the UK who signed up to deposit-free options but were unaware that the money paid into the scheme would be non-refundable and could not be used to pay for any damages.
Whilst it is important to be conscious of a tenant’s obligations, it can be problematic with agency operated schemes which charge tenants significantly more than specialist deposit replacement schemes.
So, in conclusion… It is far safer for landlords and their tenants to use a more established deposit replacement scheme.
What are the benefits of deposit replacement schemes?
Deposit replacement schemes can offer new choices and there are many benefits for agents too.
The schemes offer the same financial protection as traditional schemes, whilst minimising risk and reducing the threat of deposit protection-related fines which could come alongside non-compliance.
It is important to only consider a deposit replacement scheme if you are fully aware of the pros and cons of this option, and what you are signing up for.
Samantha Measham, Business Development Manager said:
“Unfortunately, there have been many cases of landlords and tenants being mis-sold products within the private rented sector. It is therefore very important that anybody who is considering using a deposit replacement scheme does some research first. This will ensure that there are no hidden costs, or surprises. These schemes can only ever work successfully if all parties understand the purpose of the scheme.