What is Deposit Replacement Insurance?
Many letting agents these days are offering landlords the option of taking up a ‘nil deposit scheme.’
But what is it – and why should you go ahead with it? Also referred to as a Deposit Replacement Scheme (DRS) this does away with the need for a landlord to register a tenant’s deposit with one of the statutory schemes. In other words, it takes away all the hassle of him or her getting it wrong and facing fines or worse.
How Much Does Deposit Replacement Insurance Cost?
The cost to the tenant is one week’s rent. This is paid to whoever is providing the DRS on the landlord’s behalf.
For his part the provider agrees to cover damages caused by the tenant to the value of six week’s rent (this is one week’s additional rent for most tenancies).
This benefits both the tenant and the landlord because (a) the tenant only has to pay one week’s rent, rather than five and (b) the landlord gets recompense up to the value of six weeks rent rather than five. Incidentally, it also benefits the letting agent who ‘sold’ the scheme to the landlord since most are averaging a cut of around one third of the cost of the policy.
The hard part for the provider is that he or she has to follow-up with the tenant and get them to pay up the money for damages.
The Down Side of Deposit Replacement
Not all landlords favour this scheme because they believe that if tenants haven’t had to pay money upfront then they may not be as ‘careful’ with the property.
Landlords wishing to use deposit replacement must let their tenants know that it’s an optional scheme ie they can still go ahead with the Tenancy Deposit scheme if they prefer. The reason for this is that if they let the tenant think the scheme was mandatory then the landlord would be in breach of the Tenant Fees Act which rules tenants can’t be charged additional monies. The penalty for the landlord for getting this wrong is a fine of up to £5,000.
Are Deposit Replacement Schemes FCA Approved?
The good news for landlords is that the many of the more popular schemes are indeed Financial Conduct Authority (FCA) approved. In addition, they qualify for compensation should anything go wrong and the landlord be left out of pocket.
The bigger and more well-known schemes are Canopy, Zero Deposit, Nil Deposit and Reposit. All have dispute resolution schemes should the landlord and tenant fall out over what is damage and ‘fair wear and tear.’
Are the Schemes Worth It?
From a tenant’s point of view the scheme may not necessarily be worth it. Yes, it means they have access to more potential rentals if they only have to pay a week’s worth of deposit. But, as some tenants’ bodies have pointed out, it would be possible to take out a loan to cover the five weeks rent. That way they wouldn’t be giving away a week’s worth of rent which isn’t returnable. At least the government’s deposit scheme guarantees a return of their cash if no damage has been done.
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