The zero-deposit option – words of caution for new tenants

In the private rental sector, a deposit can prove a significant hurdle, particularly for those on a low income or needing to move home quickly. Yet, even if you have a deposit, it’s effectively ‘dead money’. That’s because you will unlikely see it again until you stop renting.

Also, theoretically, you should be able to use your deposit money for a subsequent tenancy. But in practice, you will likely have to pay your next deposit before moving from your current home.

For all these reasons, a zero-deposit option – usually called a ‘deposit replacement scheme’ – may prove attractive if offered.

How do zero-deposit schemes work?

At the start of the tenancy, you agree to pay an insurance premium as a monthly or one-off fee instead of an upfront deposit. Then, when your tenancy ends, if your landlord believes they have a claim against you for damage, cleaning or rent arrears, they claim from the deposit replacement scheme provider. Claims are typically capped at five or six weeks’ rent.

The tenant’s position

However, once your landlord is reimbursed, the scheme provider will seek to recoup their outlay from you under the terms of the agreement. And should you disagree with the claim, most schemes require you to pay for arbitration with their chosen provider. Remember, you will have consented to this by entering into the zero-deposit scheme agreement.

So, overall, you could pay more – and potentially significantly more – under a zero-deposit scheme than with an upfront deposit, particularly if your landlord makes a claim.

Reversing the onus

With an upfront deposit, the funds remain yours, and your landlord must provide proof to make a claim. But there’s a reversal of that onus under a deposit replacement scheme.

You cannot be forced to accept a zero-deposit scheme

A landlord or agent can only offer a zero-deposit scheme as an alternative to an upfront deposit. Failing that, the payment(s) could amount to a banned fee. So, you may be able to seek redress if:

• you were told you must use the scheme; or
• they failed to explain you would still be responsible for the types of things usually covered by an upfront deposit.

Before agreeing to a zero-deposit scheme

You should always:

• read the agreement carefully and take advice if you are unsure about anything. You can approach several organisations, such as Shelter or Citizens Advice.
• ensure the scheme provider is authorised by the Financial Conduct Authority (FCA). Check their website or the FCA Register.