For anyone renting a property, whether it is their first rental or they are moving from one rented residence to another, raising a deposit is a major concern.
The deposit is typically equivalent to five weeks’ rent, and according to the Tenancy Deposit Scheme, the average deposit in England and Wales is £1,041. In London, the fee is much higher, at approximately £1,750.
In recent years, several alternative deposit options have emerged to make saving a deposit easier for tenants.
The difference between a traditional deposit and an alternative deposit
Tenants may have to dip into their savings or borrow money from friends and family for traditional rent deposits. Nonetheless, the advantage of this type of tenancy is that the deposit is refunded upon termination of the tenancy, minus any deductions for damages or unpaid rent.
Some landlords and letting agents are using Deposit Alternative schemes, which provide tenants with the advantage of requiring a lower upfront fee, usually equivalent to one week’s rent. There are, however, several disadvantages to these arrangements, including the fact that the one-time fee is not refundable, there may be small monthly charges, and tenants may be responsible for any damage discovered upon moving out.
How Do Tenancy Deposit Alternatives Work?
It is estimated that there are at least eight major Deposit Alternative operators, however, most of them operate along similar lines and have roughly the same rental deposit policies.
Renters are attracted to the fact that only a small holding deposit is required. Due to the fact that they have only to pay a small deposit, some renters may be able to consider larger homes or more expensive locations. Deposit Alternatives are essentially insurance policies for landlords and agents.
The provider offers protection for damage or unpaid rent up to the equivalent of six weeks in return for the one week’s rent paid by the tenant to begin the scheme – a very similar approach to traditional deposit schemes.
As with traditional deposits, most Deposit Alternative schemes use an independent arbitration system if there is a dispute over alleged damages or unpaid rent after the tenancy ends.
Additional Fees for Deposit Alternatives
- Tenants who opt for Deposit Alternatives will always lose money since a one-time, non-refundable fee must be paid upfront.
By contrast, the traditional system would return the full deposit for a rental property if the tenant returned the property in good condition and paid the rent on time.
- It is important to note that some Deposit Alternatives also charge a monthly non-returnable fee, which can add up over time to a significant amount.
A tenancy agreement may disclose these fees in the small print, which can be overlooked by inexperienced tenants unfamiliar with the necessary paperwork and procedures.
- Last but not least, some letting agencies and landlords who promote Deposit Alternatives to tenants will receive a ‘referral fee’.
This means that a portion of the tenant’s initial non-refundable upfront payment is paid to the agent.
Must Tenants Use Deposit Alternatives?
In accordance with the Tenant Fees Act, agents and landlords offering Deposit Alternatives must do so only as an option. The tenant may, if they desire, use a traditional tenancy deposit system instead.
Which security deposit scheme is the best?
Tenants, landlords, and agents are still relatively unfamiliar with deposit alternative schemes. In addition, there is little guidance on how such schemes should be presented to tenants so that they are aware of the benefits and drawbacks of the scheme.
A number of Deposit Alternative schemes are registered with the Financial Conduct Authority, which oversees almost 60,000 financial services firms; however, it is not clear whether FCA registration indicates that a Deposit Alternative service is more secure or suitable for tenants.
Alternatives to Tenancy Deposits: What Experts Have To Say
It is widely acknowledged that high traditional deposits can be a barrier for renters and that a Deposit Alternative can be both appealing and useful. In spite of this, some organizations advise renters to exercise caution and research both the scheme they choose and the fees they will be charged.
The Citizens Advice Bureau states: “We have concerns that these schemes allow landlords to sidestep restrictions imposed by tenancy deposit protection requirements introduced by the Housing Act 2004 and caps on deposits introduced by the Tenant Fees Act 2019.”