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.
So called nil or zero tenancy deposit renting scheme products can therefore offer a real solution to this problem. But are they actually as good as they claim for landlords and / or tenants, asks David Lawrenson.
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.
So what does the blurb say about this product?
Well, it is backed by Munich Re – who are one of the world’s leading reinsurers. And it is regulated by the Financial Conduct Authority.
Zero Deposit Schemes – How does it work?
So how do these schemes work?
It works like this: A tenant 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. It is the tenant who pays the equivalent of one week rent for the insurance. This is non-refundable, however.
So in effect, one could say, these are not really “zero or nil-deposit” schemes, because they ALWAYS 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.
If the company agrees the landlords claim, 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. So tenants are not off the hook.
In fact, a real big “kicker” for the tenant is that if they are chased for the debt, the tenant will end up with a CCJ on their name, making it very hard, if not impossible to secure accommodation again.
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.
But is it good value?
Well, it’s worth noting that since its introduction in 2007, deposit protection schemes have 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 tenancy deposit schemes, 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.
Folks who support zero deposit schemes claim they make renting more affordable for those already hard-pressed for cash between tenancies. And 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 flow.
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.
In summary, then, for the tenant, the opportunity to pay less up front is unquestionably appealing. Basically, whether you think they are good value, 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.
But some landlords are not keen on zero deposit schemes because, they say 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 then that they must be only a month or so away from not being able to pay the rent.
And for that reason, they are not keen on the schemes.
Maybe one day the government – Conservative or Magic Grandpa Corbyn Labour – will enforce that only zero or nil tenancy deposit schemes can be used.
Final notes – Complying with the tenancy deposit schemes has got a little harder in for landlords in recent years. They must remember to send the tenant both a proscribed information leaflet and a signed copy of the tenancy deposit scheme certificate within 30 days. Failing to do this would mean a penalty of up to three months’ rent and them being unable to serve a Section 21 Notice.
Also, if a landlord has not had a thorough, independent inventory done at start and end of tenancy, they won’t be able to make a penny from a deposit for damage or lack of cleaning.
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