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Renters increasingly turn to zero deposits as a cheaper alternative to handing over expensive security deposits to landlords before moving into a buy-to-let home.
A cash deposit always belongs to the tenant but is placed in an authorised protection scheme until the tenant moves out.
The deposit is capped at five weeks' rent when the yearly rent is £50,000 or less, which rises to six weeks if the annual rent exceeds £50,000.
Landlords can keep some of the money for various reasons. The main ones are:
The deposit is paid with the first month’s rent when the tenant moves in. With the average UK rent purported as £1,327 monthly by the Office for National Statistics in September, a new tenant must find at least £2,654 on top of any other moving costs.
Zero deposits - also termed no deposits - make renting a home cheaper.
A zero deposit scheme is a tenant and insurance company contract. The tenant pays the insurer a fee and in return for cover worth up to 12 weeks rent. The landlord never holds any money on behalf of the tenant.
The insurer settles any claim and bills the tenant. If the tenant does not pay the bill, the insurer can apply for a county court judgment, which impacts the tenant’s credit rating.
The tenant, landlord and letting agent must agree to join to set up a zero deposit scheme. A tenant cannot be required to use a deposit replacement product as a condition of offering a tenancy.
Joining a zero-deposit scheme typically costs a week’s rent, although some providers charge set-up costs and ongoing fees. Landlords pay no fees and are not involved in administering the scheme as long as the landlord has offered a free alternative of paying the deposit which would be protected. If the landlord fails to provide a free alternative, the landlord would have to bear the cost as it would likely be prohibited under the tenant fees ban.
A zero deposit scheme also means if a landlord wishes to evict a tenant, no proof of deposit is required. If the case goes to court, the tenant cannot claim the deposit was not protected or the landlord failed to hand over any prescribed information as a zero deposit scheme falls outside deposit protection legislation.
Only some tenants qualify for a zero deposit scheme. Before acceptance, the insurer will want the tenant to pass referencing. Tenants who fail referencing can offer a guarantor.
The main benefit of a zero-deposit scheme offers a landlord is making a home cheaper for tenants who can afford the rent but do not have the extra cash available for a significant deposit.
The lack of admin is also attractive, as landlords bill the departing tenant, who then liaises with the zero-deposit provider.
Landlords can offer zero-deposit deals directly to tenants without going through a letting agent as an intermediary.
The leading providers include:
Tenants can dispute a landlord claim against zero-deposit cover but must negotiate with their provider.
Most providers cover buy-to-let homes, shared properties and houses in multiple occupation (HMOs).