Guide for Tenants: Replacement vs. Traditional Deposit Schemes
The beginning of a tenancy can be something of an emotional roller coaster. Abruptly packing your life into boxes (and most likely living out of them, and take-away containers for longer than you’d like) can pile on the stress.
On top of the exciting parts, there’s always that ominous shadowy figure lurking round in the background too. The most unwelcome housewarming guest… the dreaded deposit.
Whilst this charmer has got significantly less scary since 2019, when the Tenant Fee Ban shrunk it down to a slightly more manageable size – just five weeks’ worth of rent allowed now – it’s still a hefty whack to find when you’re paying out for moving costs.
But there is some good news: as a tenant, you now have options. Not only can you now slice this beast down to size (one week deposit payment anyone?) but you also have the opportunity of spreading this payment out over the entire length of your tenancy agreement. AND your landlord benefits too, getting better deposit cover – 12 weeks’ instead of five.
All of a sudden those spooky figures look, well, quite manageable really. Let’s go over how this works.
Traditional Deposit Scheme
First let’s break down how traditional deposit schemes work. tHey’ve been around forever and work really nicely – if you’ve ever rented before you are probably vaguely familiar with them, but possibly don’t know the ins and outs.
This option requires you – the tenant (or a guarantor, a company, or local authority – someone from your ‘camp’) – to provide funds upfront to your landlord or letting agency. This can be up to the equivalent of five weeks’ worth of rent.
This can be either refundable or deducted if the tenancy agreement is breached.
Landlords are legally required to safeguard and protect your deposit with one of three governmentally backed deposit protection schemes: the Deposit Protection Service, MyDeposits, and the Tenancy Deposit Scheme. Your money must be protected within 30 days of you paying it over, and you (and whoever else has contributed) must receive a bundle of details, known as Prescribed Information. This is separate to your tenancy agreement, and must 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
If you don’t receive this information, your landlord can be in real hot water, so keep an eye out for it, and keep it safe. It can come to you via post, delivered by hand or email – just as long as you get it!
As you meander through your tenancy, your deposit just sits there in the background, not doing very much. It’s only when you get to the end of the process that it comes into its own. If you have paid your rent on time and in full, and there are no damages to the property, you would hope to receive the deposit back, in full. This must be returned within ten days if there are no concerns. However, if there have been any hiccups along the way, you could expect a deduction from your cash lump sum.
Once you have left the property, they will do a check out inspection, which is usually then compared to the inventory you signed off when you moved in. Your tenancy agreement should mention issues which would trigger a deposit deduction – but you should be pragmatic about this – if there are any glaring issues, you’ve mislaid a sofa that came with the property, for example, your landlord can rightly make a claim to replace this. They will flag these to the deposit scheme that your money is held with, and note how much is required to be held back to replace.
If you disagree with your landlord’s appraisal, the scheme has independent adjudicators who can then look at your case and make a decision whether or not the damage is justified as ‘fair wear and tear’ or your landlord has a right to withhold some of your cash. Fair wear and tear is things like grubby marks on walls, stains on carpet, signs of wear in kitchens etc – the sort of damage you would expect to come from living in a property. Damage that may cause deposit loss may be cigarette burns in carpet, holes made in walls, or doors missing from kitchen units.Rent arrears are also liable to get deposits chunked off, but that’s to be expected!
The independent adjudication team will make a decision, and your landlord will have to stick by this. They may not like it, you may not like it, but it removes any emotion from proceedings. Once adjudication is complete, the remaining deposit will be returned to you. Once it has gone to an adjudicator, the deduction isn’t up to you or your landlord.
So, in a nutshell, that’s your traditional scheme. There’s a lot to be said for it, but it isn’t for everyone, and there’s no denying the upfront cost. For many tenants (and savvy landlords) deposit replacement options are where it’s at. We’ll explain why…
Deposit Replacement Scheme
Contrary to the traditional deposit approach, the Deposit Replacement Scheme wipes out the financial hit of the one-off, upfront payment. What’s not to love?
The Deposit Replacement Scheme allows you to reduce your upfront costs, spreading the cost of your deposit across the length of your tenancy. And it;s a small cost to spread, you’re only paying for one weeks’ worth of rent, instead of the traditional five.
Ok, fair enough. You’re suspicious. So how does it work, and is there a catch?
A deposit replacement scheme is a deposit in name, but is a totally different beast to the traditional option. Your money isn’t going to be sat, static, waiting for you to finish your tenancy. It’s not there earning interest for anyone, it’s not bubbling away in a bank account, minding its own business and achieving very little. Instead, the principle is that you and your landlord are covered by an insurance policy that insures you for the amount specified (Mashroom’s policy specifies the equivalent of 12 weeks’ rent). By paying monthly, you are ultimately paying the premium costs, just like paying off your car insurance in little chunks.
If you don’t use the policy, great. You don’t get the money back (just like with car insurance) but also, you don’t lose a whacking great amount at the start. If you DO use the policy (a house party leaves your property trashed the day before you move out, for example), you’ve paid tiny amounts monthly, and you and your landlord are financially covered.
It’s a process we use a lot with other insurances – contents insurance being one that we use a lot to describe it. You don’t pay your contents insurance expecting to need it, but if someone nicks your TV, you’re super glad you did.
What about if something goes wrong, you ask? Good question.
You may have noticed that there’s no deposit scheme to adjudicate if things get tetchy between you and your landlord at the end of the tenancy.
Whilst we can’t speak for other offerings, here at Mashroom we work with RICS, a globally recognised professional body to help solve disputes, so the principle is much the same (other products may have other similar options). Your landlord will still have to provide evidence, and there’s no sneaking things past this lot, if the facts aren’t there, the facts aren’t there.
That said, whilst the payment terms are flexi, your responsibilities within a deposit replacement scheme are still the same. Rent, bills, and compensation for any potential damages are still very much the norms and need to be followed wisely.
So, what’s your thoughts?
For many, the oldies are really the goodies. Many people love the familiarity of the traditional deposit scheme, and hey, that’s ok. However, alternative methods are growing and it’s always great to be aware of the trends and innovations that help create a better experience for both parties.
Trends keep changing and so will tenant schemes. If a larger upfront fee, done and dusted, is more beneficial to you, then by all means go for it! However you do prefer to manage your money in monthly or smaller cycles, understand that there are other options on the table for you as well.
It’s empowering to know that you can manage your finances and put your mind at ease with these two options that allow you to take control. The choice on this one really is in your hands – it is your landlord/agent’s duty to provide you with a choice.
At Mashroom, we’re here to help. If you’d like some more information on our deposit replacement scheme, or any of our tenant initiatives, contact us HERE today, or book a consultation with one of our friendly agents.