Guide for Landlords: Replacement vs. Traditional Deposit Schemes
Deposits: Traditional or replacement? Your options explained
The start of a tenancy can be a rollercoaster of emotions for many.
Rent Guarantee Insurance
There’s a lot to get your head around, from tenancy agreements, to inventories, the list can seem never ending – and getting it wrong at any point along the way can leave you in hot water further down the road.
Understanding deposits can feel especially challenging – thanks to new legislation introduced in the form of the Tenant Fees Act in 2019, landlords can no longer charge more than five weeks’ work of rent as a deposit, which can feel limiting.
However, there are options. In this article we’ll talk you through the traditional deposit scheme (and how to manage it correctly), but also a more flexible 12-week deposit replacement scheme, designed to give you and your tenant a little more leeway (and a little less paperwork!).
Traditional Deposit Scheme
First of all, let’s take a quick glance at the option that has comforted many landlords, for many years.
The Traditional Deposit Scheme is an option simply requiring your tenant to lay down an upfront payment fee to you – up to the value of five weeks’ worth of rent, which can then be protected in one of three Government-approved schemes.
There are two options you can look at, a custodial scheme, or an insurance scheme. A custodial scheme means that the deposit is retained by the tenancy deposit scheme in their account – there is no fee for this option, and it’s usually the preferred option of the two.
The other is an insurance scheme, where you, the landlord, retain the deposit in your account (accruing interest on the amount), but you are liable to pay a fee to the tenancy deposit scheme for their part in proceedings.
Legally, once a deposit has been taken, a traditional deposit should be protected either by yourself or your agent within 30 days of the money hitting your account. In order to fully protect a deposit, you must either pay it into the chosen scheme, or register it (depending on whether it is an insurance or custodial scheme) and issue the Prescribed Information.
PI is a series of documents and details that must be provided to all parties who have contributed to a deposit (tenant, guarantor, company, local authority) and include:
- Where the deposit has been protected
- How the deposit has been protected
- How the deposit will be managed at the end of the tenancy
- The deposit protection certificate
- Terms and conditions of the chosen scheme
This must be issued in a document separate to the tenancy agreement, and within 30 days of the deposit being transferred. Failure to do so can leave you in real hot water. If you do not issue the correct Prescribed Information within the correct time frame, you could face a fine of up to three times the deposit, or be prevented from evicting your tenants using a Section 21 notice. Rent guarantee insurance claims are also likely to be invalid.
Assuming all has been carried out correctly, at the end of the tenancy, a traditional deposit can either be refunded in full, have a percentage deducted to pay for damages or rent missed, or kept in full by the landlord in extreme cases. However, if you look to retain any of your tenant’s deposit, you will have to request that your chosen scheme makes an assessment of the claims you are making (regarding the costs you will incur to put right the issues that the tenant has caused), providing quotes for repair, or proof of unpaid rent. The team at the third party scheme will then decide how much deposit is retained by you, and return the rest to the tenant.
Deposit Replacement Scheme
However, in today’s era of ‘levelling up’ the thought of dishing out a hefty cost to the tenant at the very first stage of a tenancy feels alien to many landlords. Despite the caps put in place by the Tenant Fee Ban, according to the Deposit Protection Service, the average deposit for a Londoner would cost around £1,750 – a hefty whack on top of moving costs.
Add into that the prospect of landlord paperwork causing potential pickles for everyone involved, and it seems like the traditional deposit options may just not be working for anyone any more?
There is another option though. Deposit replacement schemes have been eyed suspiciously by many landlords for a while, but, like any new option to this traditional market, they’re starting to filter through, and become a more mainstream option.
Contrary to the traditional norm of the deposit approach, the Deposit Replacement Scheme not only removes your tenant’s requirement of a hefty one-off, upfront payment, but it also nixes the dreaded Prescribed Information rigamarole, so there’s no risk of legal exposure if your paperwork planning slips.
AND, with Mashroom’s option (not that we’re biased or anything) you benefit from a 12 week deposit, instead of the legislated five with a traditional option (we’ll explain how).
So, how does the tenant get to pay less? In short, the replacement option is ultimately an insurance policy, as opposed to a block of money being held. Your tenant is paying the premium for the insurance policy (one weeks’ rent), which covers you for the equivalent of 12 weeks’ rent payments, rather than stumping up a full five weeks’ worth of cash to be held static in an account. The payment is made over the course of their tenancy, which significantly lowers the cost to them. They’re happy, and you are looking at more than twice the cover of a traditional deposit.
This principle is much the same across all deposit replacement schemes, some differ with the length of cover (we boast the longest in the industry, just tooting our own horn!) but they range from six weeks upwards, so all should give you a better bang for your buck than the five weeks’ you’d get otherwise.
But what about deductions? Good question. Like any insurance scheme, if you have to make a claim, you will need to provide evidence (just like with a Deposit Scheme) and the insurers will adjudicate on your behalf – so far, so familiar. Here at Mashroom, we work with RICS, a globally recognised professional body to help solve disputes, other products may have other similar options.
So what’s the small print?
You may have a firm plan in mind as to which route you want to go down. However, if you are tempted by a deposit replacement option (and why not, indeed!) do remember that it’s your duty to provide your tenant with the option to use a traditional deposit option as well. We have a guide for tenants available too, which outlines the pros and cons of both options, which could be helpful.
Your tenants should understand that they still have the same responsibilities, whichever option they choose. Rent, bills, and compensation for damages that are incurred obviously are to be expected. But spread the good tidings of knowledge to your tenant so that they may choose from either ends of the spectrum.
Trends will keep changing, and so will deposit schemes. Some may manage their money in small monthly instalments, yet others may prefer the large upfront sum. Even though the deposit replacements may become more popular, do realise that the good ol’ fashioned traditional schemes are always readily available. At Mashroom, we’re here to help give peace of mind to both you and your tenants.
Contact us HERE today, or book a consultation with one of our friendly agents.