Deposits. The traditional rental market can’t live without them. They play a crucial role when renting out a property—the tenants give you funds for foreseeable damage or unpaid rent, and it’s your job to place it in a government-approved protection scheme. You know the drill.
But while deposits work by giving you financial security, they can also be sources of stress for tenants. According to the Tenancy Deposit Scheme (TDS), the average deposit value rose from £880 in 2010 to £1,108 in 2019—that’s a 26% increase.
And let’s not forget about the disputes. A tenant can wait months to see their deposits again if a battle ensues, making forking out for their next deposit extremely difficult.
So, it’s no surprise that these issues have given rise to the deposit free rental model. Surely that solves the problem, right? Well, perhaps… Stick around, and HomeHero will uncover whether they’re a good idea for your rental business.
What is the deposit-free rental model?
To put it simply, a deposit-free rental model does what it says on the tin: there are no deposits involved in the tenancy agreement. It works by an insurance policy fronting the costs of the tenant’s deposit—which is typically around five to six weeks’ rent.
The insurance companies typically require tenants to pay into the scheme through either a one-off payment, such as a week’s rent or a monthly fee—allowing them to spend the remaining money on the things they need.
So, for obvious reasons, this sounds appealing to tenants. According to a YouGov survey, 43% of renters said they’d prefer to see deposits scrapped and replaced with schemes that offer the above. But what’s in it for property managers?
What’s in it for property managers?
Deposit free schemes offer bountiful benefits to property managers. As organisations such as Zero Deposits will be bearing the costs, property managers will receive guaranteed financial protection for their properties.
It’s also less admin work, as you won’t have to register the deposit with a protection scheme like you would traditionally.
To make things even sweeter, becoming a member will also widen your pool of prospective tenants who have passed all the relevant checks—further slimming your chances of any void periods.
Here are a few other benefits to the deposit-free rental model:
- A hassle-free dispute process—another organisation will come in and resolve any issues on your behalf, should they arise.
- Quicker move-ins
However, that’s not to say that the deposit free model is free from scrutiny. The truth is, they can pose a few disadvantages to both tenants and landlords—and it’s worth knowing what they are.
What are some of the cons?
One of the deposit free rental model’s biggest drawbacks exists in the fine print—and for tenants, this is something they need to look out for.
Insurers use a little-known clause called “subrogation”, which allows them to chase a tenant for damage or unpaid rent expenses at the end of the tenancy—even though renters have already forked out around one week’s rent.
According to the BBC, this money is generally non-refundable and cannot be used to pay for damages. But campaign groups have criticised schemes for failing to state these details clearly, and it’s left some renters out of pocket by over £500.
Georgia Laming of Generation Rent says that some agents see this as an income opportunity following the Tenant Fees Act 2019. So, it’s worth being wary that some agents are pushing deposit-free options without clarifying that it could cost renters more over time.
The model may also be confusing, especially since at least eight different deposit free products are available. Some even charge tenants as much as £100 to dispute a damage claim—and considering this fee doesn’t exist in traditional deposits, tenants may be reluctant to join these schemes.
Protecting your business
This means that tenants are more likely to terminate a tenancy early—and as a property manager, this is the last thing you want. But if you are drawn to no deposit schemes, there are a couple of things you’ll need to ensure.
Peter Savage, a former ARLA president and now a spokesperson for Zero Deposits, warns property managers about the dangers of unregulated products.
“We urge agents and landlords to act responsibly and choose to partner with only FCA regulated deposit replacement products, along with their associated protections and safeguards”, he says.
So, is it a good idea?
There’s no denying that the deposit free rental model has benefits for both tenants and property managers—initial cost-effectiveness, guaranteed financial security and less admin work, to name a few.
But the criticisms for their lack of clarity that burn a bigger hole in tenants’ pockets puts property managers at risk. If tenants are unhappy, they’re more likely to leave your property, and in our current climate, an empty property is far from desirable.
It’s worth noting that there are other options available. Councils and employers may provide interest-free loans to cover deposits.
The government also has plans to unveil a “lifetime deposit” to let renters transfer money from their previous tenancy to the next.
So, what do you think? Is the deposit free rental model a good idea? From us at HomeHero, we hope this guide helped.