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What is a zero deposit scheme and what are the pros and cons?

4 mins read
by Unbiased Team
Last updated Monday, March 11, 2024

It can be expensive paying a deposit for a new property, but there are other options, such as a zero deposit scheme. We explain how these schemes works.

Having a deposit to rent a new property can be difficult for many people. 

Landlords are required to protect this money, usually equivalent to five weeks’ rent, but zero deposit schemes offer an alternative for tenants.

Here’s what you need to know about zero deposit schemes. 

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What is a zero deposit scheme?

Normally, when tenants move into a privately rented property, they must pay a deposit to the landlord

This will be returned when they move out if the property remains in the same condition.

If there is any damage, the landlord can take funds from the deposit for repairs.  

Following the Tenant Fees Act in 2019, the deposit amount is capped at five weeks’ rent for properties where the total annual rent is less than £50,000, or six weeks’ rent if the total annual rent is this amount. 

The landlord needs to keep the deposit in a protected tenancy deposit scheme while the tenant lives in the property.  

The deposit is a lot of money for tenants to provide upfront on top of the first month’s rent.

So, zero deposit schemes were set up to give renters an alternative option. 

Zero deposit schemes, also known as no deposit schemes, allow renters to pay less money upfront and instead enter an insurance agreement with their private landlord. 

The terms of the agreement make the tenant liable for the cash equivalent of between six and 12 weeks’ rent.

The landlord can claim for any damage to the property, and the scheme will pay them and then bill the tenant.  

There have been some concerns raised by housing professionals about zero deposit schemes. 

The Competition and Markets Authority (CMA) is currently investigating concerns about whether tenants using no deposit schemes understand their liabilities, as well as about how some letting agents sell these schemes.  

If you’re a tenant thinking about using a zero deposit scheme, make sure you read the agreement carefully and understand what you may have to pay. 

How does a zero deposit scheme work?

If you’re considering a zero deposit scheme, your estate agent must be registered with a scheme to proceed.

They’ll also need to ensure the landlord is happy to use a zero deposit scheme. 

At the end of the tenancy, the landlord can raise a claim for any damage to the property.

The scheme will pay the landlord and then bill the tenants, which they can dispute.  

If the tenants don’t pay straight away, no deposit schemes can use a debt collection agency to get money from tenants, which can affect their credit rating

So, while tenants will avoid an expensive deposit initially, they could get a hefty bill when they move out. 

Do you have to pay any fees?

Yes, while the initial costs are lower than a traditional tenancy deposit, tenants still pay fees.  

To enter a no deposit scheme, tenants must make an initial payment, typically equivalent to one week’s rent, plus there may be set-up costs and admin fees. 

There are no fees for the landlord, and using a no deposit scheme can mean less admin for them, as they don’t need to set up a tenancy deposit protection scheme. 

But it’s vital to stress that with no deposit schemes, even if the landlord makes no claims, tenants will not get any of the money they’ve paid back.  

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Can anyone qualify for a zero deposit scheme?

To apply for a zero deposit scheme, the first thing a tenant needs to do is speak to their estate agent. 

Before a tenant can join a scheme, they’ll need to go through referencing, where the provider checks details about the tenant, including whether they’ll be able to afford using the scheme.  

If a tenant doesn’t pass referencing, they can ask someone to be their guarantor, who will be liable to make any payments the tenant owes if they don’t pay them. 

Guarantors will also have to pass the provider’s referencing checks. 

What are the pros and cons of zero deposit schemes?

There are many benefits and drawbacks to zero deposit schemes but remember to check your agreement as terms under these schemes can differ.  

The pros of zero deposit schemes 

  • Low upfront costs: The upfront costs for zero deposit schemes are much lower than a typical tenancy deposit.

  • Less admin: A zero deposit scheme can be less admin for landlords, potentially speeding up the moving process. 

The cons of zero deposit schemes 

  • No money back: Tenants won’t get the money they pay into the zero deposit scheme even if they leave the property in a perfect condition.

  • Potential bill when moving out: If the landlord raises a claim about any damage when tenants move out, they will need cash to pay. 

How do you settle disputes?

Before you enter a zero deposit scheme, it’s a good idea to check out their dispute policy. 

Some providers may charge tenants a fee for raising a dispute against a landlord’s claim, which can be stressful to deal with and expensive.

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Author
Unbiased Team
Our team of writers, who have decades of experience writing about personal finance, including investing, retirement and pensions, are here to help you find out what you must know about life’s biggest financial decisions.