Deposit replacement options are becoming increasingly popular with letting agents, landlords and tenants, but what is a deposit replacement scheme?
They are exactly what they say on the tin – they replace ‘traditional cash’ deposits, also known as security deposits.
Traditionally, an agent or landlord will ask the tenant to pay an upfront cash deposit when they move into the property. This protects the landlord financially against any damage to the property and any breaches of the tenancy agreement – these deposits are now capped at five weeks’ rent (six weeks, if the annual rent is over £50,000).
Deposit replacement schemes provide the landlord with the same protection, but the crucial difference for the tenant is that, rather than paying an upfront deposit, they pay a non-refundable fee.
Deposit replacement schemes offer several benefits for all parties (which we’ve outlined below), but, as with most new things, some agents, landlords and tenants are reluctant to use them because they are not quite sure how they work. Recent research by mydeposits and Ome revealed that 51 per cent of agents, landlords and tenants surveyed said they would be willing to use a deposit replacement option if they understood how they worked.
We’ve put together a list of frequently asked questions, so that you know what you’re getting with a deposit replacement scheme.
Traditional deposits are still the preferred method for most, but deposit replacement schemes are becoming more and more popular. According to our own research, carried out with our partner mydeposits, 31 per cent of respondents said they would consider using a deposit replacement scheme.
We can only see deposit replacement schemes becoming more and more popular as renting becomes more tenant led. Now is the time for agents, landlords and tenants to become familiar with how they work to stay ahead of the competition.
There are two key benefits for agents using deposit protection schemes: to reduce admin and create a new revenue stream.
You do not have to issue the prescribed information as you would with a traditional ‘cash’ deposit, because deposit replacement schemes are not subject to the same legislation as traditional deposits.
And, depending on the replacement provider, there is also the opportunity to earn commission whilst offering a service that is mutually beneficial for both landlords and tenants.
However, you need to remember that you must give tenants the choice between a deposit replacement and a traditional deposit, according to the Tenant Fees Act.
The main benefits for tenants to opt for a deposit replacement scheme over a traditional upfront deposit is cash-flow and flexibility. With traditional deposits, when a tenant is moving out of one rental property and into another, they would need to find around another £1,000 for their deposit for the new property.
Using a deposit replacement option avoids the ‘double bubble’ as there is no need for a large upfront sum whilst the existing deposit is being released.
With deposit replacement options, the tenant either pays a monthly or yearly non-refundable fee (depending on the provider), which is usually less than a traditional deposit, offering the tenant financial flexibility.
Don’t assume this leaves the tenant off the hook for any damages though. The landlord, agent or even the deposit protection scheme can still pursue the tenant for any damage to the property.
The main benefit for landlords is reduced void periods, making their properties more attractive to tenants and cheaper to rent.
Deposit replacement options provide landlords with equal protection to traditional deposits at the equivalent of five weeks’ rent.
Some providers may offer more than the standard five weeks.
Each deposit replacement scheme works slightly differently. We’ve answered the remaining questions with how we do things at Ome. You might find this differs from scheme to scheme.
We’ve previously mentioned that, depending on the deposit replacement provider, the tenant may pay monthly or yearly. With Ome’s Deposit Replacement Membership, tenants pay a small monthly fee. This monthly membership fee can also be split between the tenants in the household or managed by one.
Tenants paying a monthly fee often raises concerns with agents and landlords because of the fear of what would happen if the tenant stops paying – is the landlord still protected? For Ome’s Deposit Replacement Membership the answer is yes, they are still protected; as long as the tenant has paid for one month of their membership then the landlord is protected for the full five weeks’ rent.
The issue of the tenant not paying becomes our problem, so we will sort this out with them. There is no need for you to worry as the landlord is protected in the same way they would be with a traditional upfront deposit.
When the tenancy comes to an end there might be some damage to the property that the landlord or agent feels the tenant is responsible for. In this scenario, you should first discuss this with your tenant and try to come to an agreement. If you are able to do this, the tenant can pay the money owed and it’s all sorted.
However, if you have used Ome’s Deposit Replacement Membership and you and your tenant disagree with your proposed end of tenancy settlements, you can use our world-class dispute resolution service.
The great thing about Ome’s Deposit Replacement Membership is that we don’t charge for this service, as other deposit replacement providers do. All you need to do is escalate the negotiations to our dispute resolution team ten days after the tenancy ends via your member portal.
Sometimes, the gap between you and your tenant can be resolved by what we call ‘early resolution’. We’ll talk to both sides and see if we can help you come to an agreement. Having an impartial party do this is often more effective. If that doesn’t work, we will carry out an adjudication where a trained adjudicator will assess the case and make a decision that both sides must stick too.
This is no different to the settlement process of traditional deposits, which is no coincidence, because our dispute resolution service is run by our partner, mydeposits. They’ve been handling disputes and perfecting the process since 2007.
This is just a brief explanation of how it works, but if you’d like to know more, we’ve provided all the details on our page ‘Deposit replacement scheme disputes: How do they work?’.
If you’ve been through our dispute resolution service and the tenant still refuses to pay for damages, unpaid bills or rent, we will step in and make sure you receive the money you are owed.
The debt then becomes our problem. Tenants who have signed up to Ome’s Deposit Replacement Scheme contractually agree to reimburse us if this does happen. We also contractually agree to cover these losses and pay the landlord directly if the tenant has failed to pay. We’ll then take over responsibility for reclaiming the money from the tenant, by legal means if necessary. Find out more here.
This is not a comprehensive list of questions, but we hope you now understand more about deposit replacement schemes in general and how they work.
If you have any other questions about deposit replacement, please get in touch via hello@omehq.com or via the live chat.
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