Tenancy deposit alternatives

New alternatives to traditional tenancy deposits are starting to raise eyebrows in Northern Ireland. These schemes seem attractive at first and appear to offer a more affordable route into renting privately. But, there are drawbacks, so it is important that anyone who is considering using a zero deposit scheme to rent privately gets advice on this option.

It has become fairly standard practice for a landlord of a private tenancy to expect a new tenant to pay a deposit and a month’s rent before the tenant can move into their new home. These upfront charges often make it difficult for people, particularly anyone who is vulnerable, to access privately rented housing and it’s easy to see how more affordable alternatives might seem attractive.   

There are now a number of insurance-based zero deposit companies operating across the UK, some of whom have ventured into local markets. The growth in this business model may be fuelled by the Tenant Fees Act 2019 which capped the amount of deposit landlords can request in England to the equivalent of 5 weeks’ rent. Under the no-deposit model, the tenant pays a fee to an insurance company who then provide an insurance policy for the landlord. The fee is usually the equivalent of one-week’s rent. The fee is non-refundable and the policy cannot be transferred to another tenancy if the tenant moves.

How does a zero deposit model differ from existing deposit requirements?

New zero deposit schemes are treated as insurance policies or guarantees rather than a tenancy deposit, and do not fall under the definition of a deposit as provided by the Private Tenancies (NI) Order. Providers are typically regulated by an oversight body, such as the FCA or the Prudential Regulation Authority.

Do “zero deposit” policies have to be protected?

A no-deposit guarantee is not an actual tenancy deposit. Therefore, the money does not have to be protected in an approved scheme. Using a zero deposit model also releases the landlord or agent from the requirement to serve prescribed information within the relevant time frame.

Is this cheaper for tenants?

The immediate cost of the zero deposit model is less for tenants. But, purchasing a guarantee does not discharge the tenant from any liability for rent arrears or damage to the property. At the end of the tenancy, the deposit company will pay the landlord to cover rent arrears and damage, but will in turn pursue the tenant for these costs. The value of the fee paid is not deducted from the amount owed in damages or arrears. The debt will be passed to a debt recovery company if the tenant doesn’t pay and the costs of hiring this company can be added to the debt.

Additionally, if the tenant stays in the property beyond their initial tenancy agreement, they will have to pay again to renew their deposit policy. One company charges £26 each time the tenancy is renewed.

In the long-run, this model could be more expensive for tenants.

Does this model cater to vulnerable tenants?

It seems as though anyone who wishes to apply to use a zero deposit model will have to go through an application process. Reviews of some of the bigger schemes suggest that tenants will be subject to credit referencing. More vulnerable tenants or those who have recently arrived to Northern Ireland may struggle to pass the credit referencing element of the application process. 

What does the “fee” pay for?

The fee simply pays for the insurance policy. In one case, the insurance policy entitles the landlord to cover for rent arrears and damages equivalent to six weeks’ rent. The fee does not indemnify the tenant against any deductions in respect of damages or arrears. A tenant could pay a no-deposit fee of £150 and leave the tenancy early owing a final month’s rent of £650. In this case the cost to the tenant would be £800 to cover the £650 of rent arrears.

What happens if the tenant disputes the deductions?

One of the companies providing the deposit alternative, ZeroDeposits, says that any disputes will be referred to TDS for adjudication. However, TDS NI have no ongoing agreement to provide these services locally at the moment, so it is likely this work will be carried out by adjudicators based in England. Any person involved in adjudicating disputes over deposits will need to have a clear understanding of the specific tenancy laws which apply in Northern Ireland.

Are tenants allowed to “release” their current deposit?

The ZeroDeposit website suggests that tenants could elect to “free up cash” by opting to use this model during a tenancy for which a traditional deposit has already been paid. This would require the existing landlord or agent to release the protected deposit after the tenant has purchased a guarantee through Zero Deposits. This could be very tempting for tenants who are in financial hardship, but could leave the tenant worse off financially.

Are there other alternatives to deposits?

The Ministry for Housing, Communities and Local Government has issued a call for evidence on the subject of tenancy deposit reform. It looks at a number of potential models for making the upfront costs of renting privately more affordable, including:

• Local government supported deposit guarantee products
• Deposit passporting services which allow the tenant to transfer a portion of an existing deposit to a new tenancy
• Employer-backed loans, where employers pay an employee’s deposit and deduct this from future salary payments in manageable instalments

A tenancy deposit protection working group has been established by MHCLG and is expected to report on tenancy deposit reform in autumn of 2019. The scope of the group and the call for evidence is restricted to tenancy deposits in England.

Getting advice on deposits and other rental requirements

Of late, Housing Rights has been contacted about various unusual and new methods of demanding or paying rent and deposits, from these zero deposit schemes to a requirement for tenants to spread the cost of 12 months’ rent over 11 months in inflated monthly instalments. Before agreeing to a non-traditional method of payment, it’s important to get advice.