Understanding deposit replacement systems is key

Lettings payment provider Payprop has stressed the importance for letting agents, landlords and tenants to fully understand how deposit replacement systems work before committing to using them.

Deposit replacement schemes – sometimes referred to as zero deposit schemes – require tenants to pay a non-refundable fee of around one week’s rent instead of the more traditional upfront refundable security deposit.

Neil Cobbold, chief operating officer of PayProp, said: “It’s clear that tenants’ awareness of deposit alternatives is growing and many are interested in how the system could work for them and they could soon become a key piece of criteria for some movers.

“This means now is a good time for letting agents and landlords to carefully consider the options available to them, including the range of different providers and product variations now on the market.”

The tenant’s fee is used as an insurance guarantee, which landlords can claim compensation for in the event the renter is responsible for damage to the property.

After compensating the landlord, the deposit replacement scheme will then recover the costs from the tenant directly.

This follows recent research from Your Move which suggested that renters are increasingly interested in alternatives to traditional upfront deposits.

Half of the 4,000 adults surveyed said they were interested in alternative or insurance-backed schemes, whilst 70% said having the choice to pay an upfront deposit scheme would influence their decision on whether to rent a specific property.

Payprop argues that as more providers offer deposit alternatives and an increasing number of letting agents promote these products to consumers, it is important that new agents get to grips with what they would be offering landlords and tenants and how the system works.

Cobbold added: “Some of the key things agents need to look out for is the product’s level of cover and who the insurance policy is underwritten by.

“It’s also vital to consider how deposit alternatives fit into the tenancy process and how the system will work at the end of a tenancy if the landlord wants to charge the tenant for damage or missing items.

“Whether you’re an agent, landlord or tenant it’s essential to do your research to make sure your aware of the benefits and drawbacks to deposit alternatives. The new choices available can only be a good thing if everyone involved fully understands what they are agreeing to.”

This recommendation comes as the Tenant Fees Act is soon to be enforced on Saturday 1 June which will restrict the number of chargeable items for which letting agents can charge a fee to tenants.

David Cox, chief executive of ARLA Propertymark, commented: “It is important for agents to ensure they’ve implemented the correct changes within their business in order to be compliant with the law, and feel confident communicating what the changes mean to clients.

“Breaching the ban can result in a penalty of up to £5,000, and further breaches of the ban will either incur a £30,000 penalty or be prosecuted as a criminal offence with an unlimited fine and a banning order.

“Therefore, it’s vital members ensure they have everything in place to be compliant as time is running out.”

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