Zero deposit renting: an option worth exploring?
Article Posted - 21st August 2019
It's fair to say that both landlords and tenants have a lot to think about when beginning their tenancy. For many tenants in the sector deposits can be a headache when moving into a new property.
With the recent implementation of Client Money Protection (CMP) rules and the Tenant Fees Ban coming into force, a new alternative is emerging in the market: zero deposit renting.
And there's good reason why. Data from TDS (tenancy deposit scheme)shows the average deposit in England and Wales now exceeds £1,041, while deposits in London are typically in the region of £1,750. This high cost of rental deposits directly translates into growing demand from tenants for an alternative. Letting Agent YourMove has produced research showing that some 70 percent of tenants felt having the choice to pay an upfront deposit scheme would influence their decision about whether to rent a specific property.
Over half of the 3,752 adults surveyed said that they would be interested in an alternative approach to tenancy deposits which includes zero deposit schemes where the tenant may pay a non-refundable fee of one week's rent to move in, rather than an upfront deposit.
So for landlords, the demand is there but many industry actors have raised concerns about the safety and viability of the schemes. What are the risks, regulations and procedures of the zero deposit products that you should be aware of?
As the Tenant Fees Act came into force on 1 June 2019, so did a new marketplace. For those landlords considering zero deposit schemes, you will have several different models with varying coverage but ultimately, many will have a similar approach and have relatively similar perks.
Landlords are promised greater protection than the capped five-week security deposit, with the schemes offering the following benefits:
pay a non-refundable fee of one week's rent (the fees are shared between the tenants if they are renting as a group)
faster on-boarding of prospective tenants
fewer void periods
less hassle when tenants move out
coverage ranging from 6-12 weeks
independent adjudication for disputes.
These new services are divided between companies who are FCA (Financial Conduct Authority) regulated and sell insurance policies to tenants (but only some of the actual products fall under FCA regulation), and those where only the scheme insurer themselves are insurance-backed but the products are not.
Are there risks?
Landlords will need to be careful when choosing a deposit alternative provider, and understand the scheme they are entering into. They are such a recent addition to the market that there is no established record of pros and cons of the products in practice. While many schemes claim to offer more coverage than the capped five week deposit, there are many potential risks and landlords should assess the consequences of what would happen if their chosen provider failed, leaving them with no protection.
In keeping with usual NLA advice and best practice, you as a landlord should be reading the small print in any product, as many products may not be regulated or have conditions that would limit the protection offered to you.
Some tenants and landlords may find that traditional deposits work better for them. While offering a higher up-front cost, traditional deposits give many tenants the chance to recover all of the money at the end of the tenancy, rather than a week's upfront guarantee that they will never get back. In the end, for tenants who take good care of where they live or move regularly, the longer-term costs could end up higher than the amount needed for a traditional five-week cash deposit.
Is it FCA regulated?
To put it simply, it depends on the product.
All providers who are FCA regulated are unsurprisingly, required to follow all regulations and guidance set out by the FCA. This is an extensive list of rules that ensures providers follow best practice and protect consumers. However, this is not the be all and end all for a landlord. As cited earlier, it is critical that you read the small print and ensure you have financial protection under the Financial Ombudsman Service. The key reason is that while a provider may themselves be regulated by the FCA, their product may not be. The best approach you can take is to:
a) Always ask if the product you're being sold is an insurance product
b) Check if the said product is FCA regulated.
For any further guidance on this issue, it is recommended you contact our advice line on 020 7840 8939.
How are you covered?
In regards to breaking down the schemes for landlords and the coverage you receive, ARLA Propertymark have produced a useful breakdown on the majority of the zero deposit renting schemes, where you can read the cover provided to landlords here (pg.4). If you are a landlord looking to be paid for any claim that may arise at the end of a tenancy, all providers offer some kind of dispute resolution, you can use the above guide to assess the dispute resolution.
As a rule of thumb, we recommend you always ask yourself these questions when looking at a potential provider:
Is the cover provided by the policy sufficient, and are you confident it will pay out?
Are the actions of uninsured third parties (visitors or unauthorised sub-tenants) covered?
What is your right of appeal if a claim is denied?
If the scheme is collecting rent, does it have adequate client money protection insurance?
Zero Deposit partnership with the NLA
For those landlords who decide that a deposit alternative is the right choice for them, the NLA has partnered with Zero Deposit. The scheme allows tenants to pay the equivalent of one week's rent for a non-refundable guarantee, which gives the landlord similar cover to a six-week deposit. The tenant remains responsible for any damage or unpaid rent and – if the landlord and tenant do not agree the claim at the end of the tenancy – the case is sent to The Dispute Service (TDS) who review the evidence and provide an impartial adjudication. Zero Deposit pays the landlord quickly in the event of a successful claim and then seeks reimbursement from the tenant.
On the launch of the partnership, Richard Lambert, CEO of the NLA, said: “We looked very carefully at this market and considered the various products available. Zero Deposit is the best organisation to recommend to our members, because they have thought through and answered all the issues, and gave us the reassurance that both the company and the product were regulated by the FCA.”
You can find out more about the offer for NLA members here.
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