Deposit-free schemes: how they work, costs and what to consider

If you’re struggling to save for a deposit, a deposit-free scheme may help – but what’s the catch? We reveal how these schemes work, how much they cost and what you need to watch out for.

How deposit-free schemes work

If you’re thinking of renting, you could end up spending over £1,000 on a deposit, according to the Tenancy Deposit Scheme.

That’s a significant sum to stump up, even after a recent clampdown on other fees that tenants face.

So, it’s understandable why deposit-free schemes can seem so appealing.

But there are a few things to consider before jumping into one of these schemes, which are offered via the likes of Countrywide, Foxtons and Connells, among others.

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How do deposit-free schemes work?

A deposit-free scheme aims to slash the upfront cost of moving while providing the landlord protection in case of damage to the property and rent arrears.

Tenants tend to pay a non-refundable fee to buy a product or join a service that also offers the landlord protection against financial loss.

There are many schemes on the market with some being billed as a form of insurance, yet it’s not comparable to traditional insurance products.

In some cases, an agent may get commission for selling a deposit-free option, so it’s best to do your research first and make sure this product is right for you.

Watch out for fees and charges

If you don’t understand what’s on offer, there’s a chance you may be hit by surprise fees.

“Some [deposit-free schemes] are decent options, but others – particularly those which charge a monthly fee ­– seem downright exploitative,” warns Hannah Slater, senior communications manager at Generation Rent.

Out of the deposit-free schemes on the market – which can be owned by anyone – only some of these are regulated by the Financial Conduct Authority (FCA).

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As deposit-free renting is a relatively new concept, there are no rules about how much people can be charged, and no cap on monthly or annual fees.

Due to these factors, Slater argues a deposit-free scheme is unlikely to save tenants any money – with some of the worst schemes owned by estate agents as these tend to charge a monthly fee.

On top of this, she believes the schemes are not properly tested.

If anything goes wrong, Slater recommends going to the FCA although tenants can dispute any charges by a landlord first.

Amy Hughes, a spokesperson at Citizens Advice, is also concerned.

“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,” says Hughes.

Costs could exceed a typical deposit

Analysis by Generation Rent found that charges on a typical deposit-free scheme can, over time, exceed the cost of a typical deposit (and of course, a deposit is something you can actually expect to get back).

According to the organisation, you could end up shelling out up to £864 for a two-year tenancy in non-refundable costs – and the figure could be even higher if a landlord makes a claim when the tenancy ends.

Generation Rent has compiled a useful table of how much you could be expected to spend by comparing a number of deposit-free schemes.

The calculations are based on a tenant taking on a typical 12-month tenancy costing £600 per month, which the tenant then renews after a year but leaves at the end of the second.

The full comparison table is available here.

Hughes at Citizens Advice warns that over the course of a tenancy lasting several years, you could end up paying hundreds – or even thousands of pounds – under a deposit scheme.

And worst of all, you can’t offset any of this money against any future liabilities.

Are deposit-free schemes fair?

According to The Consumer Rights Act, an agreement may not be binding if it is seen as unfair.

A tenancy agreement could be seen as unfair if it creates an imbalance between the landlord and the tenant, to the latter’s detriment.

Hughes argues core terms of a tenancy agreement may be exempt from the requirement of fairness if it’s well explained and clearly presented as an option.

An option for some, but know what you're signing up for

So is a zero deposit scheme right for you? By now you'll see the up-front savings can soon be wiped out by the hefty charges imposed.

So if you are keen to sign up for one of these schemes, make sure you take the time to read through the fine print and know what your rights are.

The rest of this article will look at how some of the most popular zero-deposit schemes work, starting with Zero Deposit.

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Review of the Zero Deposit scheme

Zero Deposit is authorised by the FCA.

Rather than pay a traditional deposit, tenants sign up for the non-refundable Zero Deposit Guarantee.

This costs the equivalent of one week's rent and cannot be used against any claims once you move out, unlike a traditional deposit. 

If there are several tenants, the cost of any fees or payments to the landlord after you move out can be shared.

To repeat: all this does is replace your deposit, so you could have to pay far more when it comes time to move out.

The Guarantee works for landlords as Zero Deposit promises to pay them six-week's worth of rent if things go wrong.

What other fees are there?

Under the Tenant Fees Act, tenants no longer pay for various fees, including referencing, admin, check-in and check-out.

Yet Zero Deposit charges a £26 annual admin fee per tenancy to cover the cost of issuing new documents every year and £40 for someone to move in if another person leaves.

There’s no fee to cancel the guarantee and you can cancel within 14 days of buying one.

As Zero Deposit is not a letting agent, it isn’t illegal for them to charge an admin fee, but you could avoid this cost by choosing a traditional deposit.

Letting agents can charge for changing a tenancy but this applies to the person asking for the change.

Can I dispute any claims?

You can dispute any claims when you move out but if The Dispute Service, which rules on any disputes, sides with the landlord, Zero Deposit will settle with them and get reimbursement from you.

If you fail to pay up, your debt will be passed to a debt collection agency, which could cost you more and may negatively impact your credit rating.

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Review of the flatfair scheme

Flatfair works a little differently as it’s a deposit-free 'renting platform', where you sign up, pay a one-off membership fee and add your debit card as security.

By providing your debit card details, flatfair can charge for any ‘lawfully established’ end of tenancy charges.

Fees to watch out for

The one-off fee is either one week’s rent plus VAT or £120 and VAT ­– whichever is highest.

So, if you have monthly rent of £800, you’ll pay £222 for membership, which is split evenly between all sharers, per tenancy.

Flatfair says landlords benefit from extra protection (up to 12 weeks’ rent) and get paid faster.

But all tenants renting the same accommodation must either agree to use flatfair, or a traditional deposit – they can’t use both.

Flatfair says some operators choose to subsidise the fee for a tenant, so they could secure a property for only £24.

On top of this, tenants can get up to 20% off a future membership fee depending on if there were any tenancy charges or rent arrears.

When does membership expire?

It’s important to note that your membership expires when your tenancy does ­– and you need to be invited by a letting agent to use the platform.

Due to the way membership works, it’s questionable whether flatfair actually offers a one-off membership fee as a new tenancy (at a different property) will technically trigger a new fee.

You can convert an existing deposit into a flatfair membership, and your landlord or letting agent should refund the remaining amount.  

Of course, the membership fee is non-refundable, and you are fully liable to cover the cost of any damages and unpaid rent when your tenancy ends.

You can dispute a claim within 10 days, which will cost £100 plus VAT, although you will be refunded if it’s made ‘in good faith’ (and you don’t lose).  

If you want to be a member, your annual salary needs to be 2.5 times your annual rent and you need to hold no adverse credit.

According to Statista, the average UK rent is £967 ­– so you would need an annual salary of around £29,000 to qualify based on this rent, which is slightly lower than the national average.

In some cases, a previous landlord’s reference may be requested, and you may need to pass agency referencing, which is paid for by the agent or landlord.  

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What if I don’t fulfill these conditions?

If you fail to meet these conditions, you’ll have to pre-pay rent on a quarterly basis or have a UK-based guarantor with at least three times annual income compared to the annual rent.

If you have to fork out rent on a quarterly basis, you could end up paying nearly £3,000 in one go, which is an eye-watering amount to stump up.

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Leaders offers a ‘no deposit’ option under its tenancy membership, Residency, which incurs a monthly subscription fee although you can choose a traditional deposit at any time (with one month’s notice).

Members also get access to benefits including legal advice, a free will and co-habitation agreement, as well as help with their personal finances and getting on the property ladder.

Fees to watch out for

Membership starts from £30 per month for a property (so flat-sharing tenants can split this cost), and you have to apply at a local branch.

As usual, there are a few catches to be aware of – primarily that the property has to be listed with a ‘no deposit option’ and you’ll be liable for any damages when you move out. There’s a third-party adjudicator for any disputes.

According to Generation Rent, tenants need to pay £120 to dispute a claim by their landlord although this may be refunded depending on the outcome.

Under a traditional deposit scheme, you usually don’t have to pay to challenge any proposed charges.

A big issue with this scheme is that you may be paying a lot of money on top of rent every month for services you don’t necessarily need.

As we’ve mentioned before, you’ll lose that money forever and won’t be able to use it to pay for any damages or cleaning costs when you move.

In a year, the whole household will pay at least £360 for using this scheme, although this will rise the longer you stay in the scheme.

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Review of the Reposit scheme

Once you’ve found somewhere to rent, you can ask your agent or landlord to refer you to Reposit, which is authorised by the FCA.

You’ll need to pass reference checks or have a referenced guarantor to be eligible.

People on benefits and students with no credit score can use this scheme but need a decent guarantor to pass the reference checks on their behalf.

Fees to watch out for

The then tenant pays one week’s rent, which essentially is a service charge to allow the landlord to be added to Reposit’s insurance policy, underwritten by Canopius, a Lloyd’s of London syndicate.

Only a portion of this fee is used to add the landlord to the insurance policy.

Yet again, the fee is non-refundable, so you can’t use it to offset any charges for damages at the end of the tenancy.

As you don’t benefit from the policy, you can’t cancel the policy or make a claim, and if you continue your tenancy beyond a year, you’ll be hit with a £30 admin fee (split equally between all tenants).

If you decide to challenge a landlord’s claim and lose, you’ll be charged a £120 admin charge.

"This is designed to disincentivise unscrupulous disputes from tenants, given the lack of deposit in place," Reposit explains on its site.

The company says it’s yet to charge anyone £120 – implying not many people are challenging these claims (within seven days no less) or that they have won their case.

There are no extra charges if the outcome is split between the landlord and tenant.

As we have highlighted before, defaulting on any liabilities can be dangerous as you could be hit with fees and your credit score could be impacted.

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A final warning on 'zero deposit' schemes

While zero deposit schemes can help people rent at a fraction of the price, it’s still a relatively new (and growing) area that does not benefit from complete regulation.

As you'll have sussed by now, zero deposit schemes simply mean you shell out for your security deposit over time rather than paying it upfront. In return for this benefit, you'll never get that money back again

What's more, there’s a danger that people already struggling to build a deposit may be hit by surprise fees when they move.

So, it’s vital to do your research and understand how these schemes work, what your rights are and how you can dispute any unreasonable claims.

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