As alternatives to the traditional security deposit scheme continue to gain popularity, it's important for letting agents, landlords and tenants to fully understand how these systems work before committing to using them, according to PayProp.
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.
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.
Recent research from Your Move suggests that renters are increasingly interested in alternatives to traditional upfront deposits.
Some 50% of almost 4,000 adults surveyed said they were interested in alternative or insurance-backed schemes, while 70% said having the choice to pay an upfront deposit scheme would influence their decision on whether to rent a specific property.
Over half of those taking part in the study were aged between 25 and 44 years with children at home or private tenants aged 45 and over.
"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," says Neil Cobbold, Chief Operating Officer of PayProp, the lettings payment provider.
"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."
With more providers offering deposit alternatives and an increasing number of letting agents promoting these products to consumers, it's important that agents who haven’t yet entered the market get to grips with what they'd be offering landlords and tenants and how the system works.
"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," explains Cobbold.
"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."
Providing more choice is a necessary step in catering to a growing, increasingly diverse population of private renters.
"Upfront deposits may not be as much of an obstacle for the higher number of older tenants and family renters living in the PRS, who may also prefer to put aside a larger sum of money for the duration of their tenancy which they can get back at a later date," says Cobbold.
"That said, for those who find sourcing funds for a traditional deposit a moving deterrent, alternative products are a welcome addition to the marketplace."
"It’s also very important for tenants to do their research and think about what is best for their circumstances," Cobbold adds.
"A small upfront fee and subsequent insurance policy may seem more appealing, but it might not always be the best option in the long-term."
"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," he says.