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Zero-deposit tenancies are becoming popular with landlords and letting agents, but are they as good as they seem?
Renters say zero deposit home rentals can leave them out-of-pocket, while many wonder if the scheme breaks tenant deposit laws.
To find out, the Guild of Landlords lifts the curtain to see how zero-deposit rentals work.
Landlords and letting agents may call their zero-deposit options by different names, but they tend to mean the same.
If you hear ‘deposit replacement’ insurance or guarantee, they are talking about a zero-deposit scheme.
Some landlords, especially letting agents, are keen for renters to take the option as they can pick up a commission for every scheme sold. This commission can be up to 30% of the initial contract value.
The attraction for tenants is the zero-deposit cover replaces any security deposit required by the landlord.
Typically, tenants will pay less for the cover than they would for a security deposit, but the downside is they are likely to pay more at the end of the rental if the property needs repair. The tenant remains liable for damages or rent arrears despite paying the premium to some companies.
Taking out zero deposit cover is usually cheaper than paying a security deposit.
Renters typically pay a monthly or a non-refundable fee when they move into their new home.
When the tenancy ends, the landlord can claim cleaning costs, rent arrears, and repair any damage to the property.
The insurer settles the bill and expects the tenant to repay the claim amount. The company can take renters to court if they fail to pay.
Landlords can only offer zero-deposit options as an alternative, but not instead of a security deposit.
If the landlord offers no other choice, the zero-deposit premium may be illegal under the tenant fees ban.
Lawyers and housing charities also warn renters can complain to a redress scheme if they were forced to use a zero-deposit company and not told that they would still have to pay to put right any damage to the property.
An Observer investigation has uncovered evidence of pressure-selling tactics by some agencies in England, including cases where people were told they were required to sign up as a condition of securing a tenancy.
The Guild's advice to subscribers is to avoid zero deposit schemes and take a deposit to be protected.
It’s a good idea to consider the tenant disputing any claim against their zero-deposit insurance from the start of a tenancy.
Ensure your rental business has a dispute resolution policy.
Sign and date the document and give a copy to the tenant from the outset of the tenancy.
The difference between ending a zero-deposit tenancy and any other is that no money is set aside as a security deposit to pay rent arrears or repairs to the property.
Renters can dispute the amount to pay and may complain to a redress scheme if they were told they must use a zero-deposit scheme or the terms were not adequately explained.
The Financial Conduct Authority, the government financial services watchdog, authorises most companies to offer zero-deposit products. You can check a listing on the FCA register.
Landlords can choose not to take a security deposit or ask for one at any level up to five weeks’ rent for a tenancy worth less than £50,000 a year.
Renters can opt for a zero-deposit deal as an alternative.
If the security deposit is unaffordable, renters can ask the local council or housing charity for help.
Many providers offer zero-deposit schemes for landlords, and terms and pricing vary between each.
Renters should expect to pay a week’s rent plus £50 upfront and a payment of around £20 a year.
Most landlords using a zero-deposit service advertise the option on the rental property particulars.
Zero deposits are legal, although concerns about misselling abound. National Trading Standards, which is charged with making sure the buy-to-let market runs fairly, says an investigation is underway with a view to legal action against some landlords and letting agents.
As mentioned earlier, the Guild does not recommend using any zero-deposit products, and the Observer has found problems with selling these products.