Zero or Nil Tenancy Deposit Schemes
Zero or Nil Tenancy Deposit Schemes
In the last month, another “Zero Tenancy Deposit Scheme” has been launched, but are they a good idea?
Deposits are now limited to five weeks’ rent for all tenancies starting on or after 1st June 2019, by order of the recent Tenant Fees Act, (except for where annual rents are over £50,000, (where, for some reason best known to government, those, presumably wealthier, landlords can charge six weeks’ rent)).
For tenants, moving from one rental property to another, the issue of finding the money to stump up for the deposit on a new rental before they have got the deposit back on an old one, can be a problem.
But are these so called nil or zero tenancy deposit renting scheme products a real solution to this problem. Are they actually as good as they claim for landlords and / or tenants, asks David Lawrenson of www.LettingFocus.com.
Well, I remain unconvinced. And I will explain why.
But first, what are Zero or Nil Deposit Schemes?
Well, the process varies slightly from scheme to scheme but here we will look at the Zero Deposit product of ZeroDeposit.com as this is fairly typical. The National Landlords Association has endorsed this product, including it among its list of preferred suppliers.
So what does the blurb say?
Well, the product is backed by Munich Re – one of the world’s leading insurers. So that is reassuring. Plus, ZeroDeposit.com is regulated by the Financial Conduct Authority, with “all the protections that entails, including the Financial Ombudsman Service and the FSCS compensation scheme”.
Zero Deposit Schemes – How does it work?
It works like this: It is the tenant who effectively buys a guarantee from the insurance company – and this gives the landlord “the equivalent security of a six week cash deposit” for up to ten years of a tenancy. The tenant pays the equivalent of one week rent for the insurance. This is non-refundable.
So you could say, these are not really “zero or nil-deposit” schemes, because they actually cost the tenant a week of rent. Perhaps they should be better called, “One Week Rent Schemes”?
Zero Deposits have partnered with The Disputes Service, which resolves any claim disputes. At the end of the tenancy, if the tenant and landlord do not agree about any claims made by the landlord, evidence goes to The Disputes Service, just as it would with a deposit in the custodial version of the government’s tenancy deposit scheme.
The company say they will pay the landlord within two working days of receiving The Disputes Service’s decision. (That is assuming that The Disputes Service finds in favour of the landlord). Once they have paid a landlord, they will then chase the tenant for reimbursement.
They are proud of the fact that with the recent capping of most deposits at five weeks rent, their product actually provides for an extra week of cover.
They add, “Only those tenants who have been offered a tenancy on standard terms, with monthly rent payments and a normal deposit can be offered Zero Deposit”. I’m not sure what “standard terms” means in this context, but I would hope it does not mean that Zero Deposits tells me what I can and cannot put in my tenancy agreements. That would be a big “No no”. (I will do more research into this in due course).
Tenants and Zero or Nil Deposit Schemes
Is it good for tenants?
Despite not paying an up-front five weeks’ deposit in the traditional sense, tenants still remain liable for financial loss or damage due to the landlord up to 6 weeks’ rent.
It’s worth noting that since its introduction in 2007, deposit protection has seen disputes between landlords and tenants drop to a very low level. I have seen figures claiming that only 2% of deposits go to dispute. And more often than not, deposits are apparently usually returned to the tenant in full.
So this means that compared with traditional deposits, the only real benefit to the tenant is that the problem of finding the cash for a new five week deposit before they get the deposit money back on the old tenancy, is solved. Well, solved at a cost of a week of rent.
Supporters of zero deposit schemes claim they make renting more affordable for those already hard-pressed for cash between tenancies.
With the average deposit in the UK currently sitting at around the £1200 mark – there can be no argument that zero deposit schemes help with tenant cash flows.
But in the long run, as zero deposit policies are non-refundable, whereas tenants who comply with all their tenancy obligations more often than not receive their entire up front deposit back at the end of their agreement anyway, zero deposit schemes will likely end up costing tenants more overall in the long run.
But, hey, isn’t that always the case with insurance? You kind of expect there to always be a profit in it for the insurer!
In summary, then, for the tenant, the opportunity to pay less up front is unquestionably appealing. Basically it all comes down to tenants needing to weigh up the cost of losing a week of rent forever with a nil deposit scheme versus forking out considerably more up front but eventually getting most, if not all, of that money back via a traditional deposit scheme.
Landlords and Zero or Nil Deposit Schemes
So what about for landlords? Are these zero deposit schemes a good idea for them?
Well, in a normal, traditional custodial and insurance based tenancy deposit scheme, where the tenant pays five weeks’ or six weeks’ rent, should there be a dispute about the deposit, a landlord can also utilise an impartial adjudication process, which is also free.
So no difference there really.
The scheme I use is one of the insurance based schemes – it is run by MyDeposits. I pay a one-off fee of about £20 for each tenancy protected and that insurance runs for as long as the tenancy runs for. In return, landlords like me get to keep the tenant’s deposit for the whole term of the agreement – and potentially earn interest on it too or give it back to the tenants. (The tenancy agreement should say which).
Only at the end of the tenancy do I have to make sure I have the cash available from somewhere to return the deposit to the tenant, (less, of course, any deductions for damages over and above fair wear and tear or for cleaning or for unpaid rent).
So far, I have only made deductions in about 5% of my tenancies. One was for the whole amount, the others were all for less than £200. All the deductions were agreed by the tenant, none was disputed.
Of course, the likes of Generation Rent and Shelter, would doubtless say, “Well, the tenant could do with that cash flow too – and it is hard for them to pay another deposit, while waiting to get the money back off their old deposit”.
There is truth in that.
Zero or Nil Deposit Schemes – The Big Reason I Don’t Like Them
But there is a killer reason why I like it that way.
When we assess tenants, we do reference checks, credit checks and check tenants’ bank statements. We want to know that the tenants can afford our rents comfortably. If a tenant could not afford to pay a five week deposit because they were waiting for the deposit to come back from their last tenancy, that would indicate to me that they must be only a month or so away from not being able to pay the rent.
That is not the sort of tenant I want! And that is the main reason why I won’t be offering “zero deposit tenancies” any time soon. However, these schemes will have a place, though in markets where the majority of tenants have more limited means, particularly for those on benefits.
Maybe one day the government – Conservative or Magic Grandpa variety – will enforce that we can only do these sorts of zero or nil tenancy deposit schemes. Until they do, I’m staying with doing things the way I have done them to date! I’m still taking a five week deposit.
Final notes – Complying with the tenancy deposit schemes has got a little harder in recent years. You must remember to send the tenant both a proscribed information leaflet and a signed copy of the tenancy deposit scheme certificate within 30 days. But that’s hardly a difficult thing to do. It is important though because failing to do this would mean a penalty of up to three months’ rent and you being unable to serve a Section 21 Notice.
Always make sure to have a thorough, independent inventory done at start and end of tenancy. If you don’t do this you won’t be able to make a penny from a deposit for damage or lack of cleaning.
And, final footnote: Tessa Shepperson of LandlordLaw has pointed out that in the Zero Deposit Schemes, as the tenant is chased for any debt owing, there is an increased chance of tenants ending up with CCJs. This will make it almost impossible for them to secure any more private rented or social housing accommodation in the future.
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We advise a range of organisations too to help them develop and improve their services and products for private landlords. David Lawrenson, founder of LettingFocus, also writes for property portals, speaks at property events and is regularly quoted by the media.
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