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.
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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
Costs could exceed a typical deposit
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
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Review of the Leaders scheme
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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