What are the main differences between a traditional cash deposit and a deposit replacement option? We've done the research, so you don't have to! Find out below which option could be most suitable.
What types of security deposits are available?
The majority of rental agreements will require tenants to pay a security deposit. This is usually up to 5 weeks' rent and is protected with a deposit protection scheme by the landlord or their agent. For tenants who prefer not to provide a cash deposit, deposit replacement schemes are available if the landlord agrees.
Deposit replacement products can be attractive to tenants who prefer not to commit a cash deposit for the duration of the tenancy, instead using the money for other purposes. These products are not specifically designed for those tenants who do not have access to a cash deposit.
What is the difference between a deposit replacement product and a cash deposit?
Deposit replacement products protect the landlord in the same way as a more traditional cash deposit. Instead of lodging a cash deposit with the landlord or agent, a deposit replacement product protects the landlord in the event their tenant fails to abide by the terms of the agreement and the landlord suffers a loss. Whilst deposit replacement products will vary, it is not unusual for them to offer protection above the level of a cash deposit. This can be an attractive proposition for landlords as they weigh up the pro’s and con’s of both options.
It is important to understand that deposit replacement products are not an insurance product to protect the tenant from non-performance of their obligations. The deposit replacement product only makes good the landlord's loss where their tenant fails to pay monies owed to the landlord. The deposit replacement scheme will pursue the tenant for monies owed.
Here’s a brief overview of the main differences between more traditional cash deposits and deposit replacement schemes:
Deposit replacement product
Upfront payment required?
|Yes – a refundable payment up to 5 weeks’ rent
|Yes – a non-refundable payment that may vary according to the scheme provider.
Upfront payment amount?
|Up to 5 weeks’ rent
|Typically 1 weeks’ rent
|Scheme-dependent, may charge a monthly or annual renewal fee
Will the deposit be returned at the end of tenancy (minus any deductions)?
|Yes, minus any deductions made by a landlord claim
Protected by a Government scheme?
|Yes, must be in one of the Government deposit protection schemes
Level of protection offered
|It’s usually the amount initially paid (often up to 5 weeks’ rent)
|It may be greater than 5 weeks’ rent, depending on the replacement scheme
How are landlord claims paid out?
|Deducted from the deposit once agreement between landlord and tenant has been reached
|This varies from scheme to scheme. As a general rule, the guarantee only pays where a tenant fails to pay monies owed at the end of the tenancy
Are deposit replacement schemes legal?
Yes, deposit replacement schemes are legal.
What are the benefits of deposit replacement schemes?
If the landlord or letting agent offers an alternative to traditional tenancy deposits, there are benefits for both tenants and landlords. For landlords, offering the option of a deposit replacement scheme may have the added benefit of appealing to a wider tenant base and therefore reducing void periods. A number of deposit replacement schemes offer landlord protection in excess of the five-week cash deposit cap mandated by regulation. For tenants, it reduces the financial burden of moving into a new home.
Both tenants and landlords can benefit from deposit replacement schemes. Please note that there are regional variation between England, Scotland and Wales. So, if you are interested in finding out more, contact your local branch.