Should I pay a deposit or use a deposit scheme?

Written by
Canopy Blog Team
Canopy Blog Team
Renters
August 26, 2020

Have you ever been in the situation of where you’re in between rentals having to stump up the cash for your new rental property without getting the rental deposit back from your last place? And you don’t know how you’re going to be able to raise the money for the deposit on your next place? Or do you generally just worry about how you are going to raise the huge cash deposit for your next rental property?

The cash deposit is easily one of the biggest costs associated with renting. It’s usually the equivalent of 5 weeks rent. And according to the Tenancy Deposit Scheme, the average deposit in England and Wales is £1,041. And for those renting in London it’s around £1,750.

Due to these high costs, in recent years a number of rental market providers have launched deposit alternative solutions, which allow you to pay just a small fee - usually equivalent to 1 weeks rent, covering them for the duration of their tenancy. But are they worth it? And should you use a deposit alternative scheme for your next rental property?

We take a look at the key differences between a traditional rental deposit and deposit alternative schemes - including the pros and cons.

Traditional Deposit Vs. Deposit Alternative

So what’s the difference between a traditional cash deposit compared to a deposit alternative? The biggest difference is that instead of having to find a 5 or 6 week deposit alongside your first month's rent, going down the deposit alternative route means you'll typically only be required to pay a small one-off insurance fee (called a premium). Your insurance fee is likely to be equivalent to around one week's rent compared to a refundable deposit which is likely to cost over £1,000.

In return for the one off fee paid by you to start the scheme, the insurer will provide the landlord cover for any damage or unpaid rent up to the equivalent of six  to 8 weeks – which is very similar protection to the traditional deposit scheme. 

At the end of the tenancy, if there is a dispute over alleged damage or unpaid rent, then most deposit alternative schemes use an independent arbitration system; again, this is similar to what happens with traditional deposits.

This arrangement provides you and your landlord with the same level of protection as a traditional deposit, so both sides of the rental transaction can have the peace of mind they desire.

Advantages Vs. Disadvantages of Deposit Alternative Schemes  

So if the deposit alternative schemes act in the same way as a traditional deposit what are the benefits of going down this route? The obvious one is that it's cheaper and puts less pressure on your finances when you move home. 

Not stumping up a large cash deposit will also leave you with more money in your pocket. Which  you could put towards a deposit for a future property purchase, use it to pay for a holiday or to buy furniture for your rental property - the choice is yours, that's one of the biggest benefits of choosing a deposit alternative scheme.

Another reason for choosing a deposit alternative scheme is that by providing only a small holding deposit you could also have a wider choice; for example, you may be able to consider a larger home or a more expensive location because you only have a small deposit to pay. A traditional deposit on a rental property of that size or in such a location could be unaffordable.

There are of course some things you need to be aware of with these schemes. Such as the one-off fee you pay is non-returnable. This is unlike the traditional system where, if you return the property in good condition and are up to date with rent, the deposit for the rental property is returned in full to you.

Some schemes also involve a small monthly non-returnable fee. This can add up to a substantial sum over time. Typically these fees are often disclosed in the small print of the tenancy agreement and can be overlooked if you’re an inexperienced renter, who's not familiar with the paperwork and procedures involved in renting a property.

Finally, although it is not necessarily disclosed to you, some letting agents and landlords who promote deposit alternatives schemes to tenants will get a commission or referral fee’. In other words, this means part of your initial upfront non-returnable payment, in fact, goes to the agent. 

Do you have to use a Deposit Alternatives?

There are plenty of pros and cons of using deposit alternative schemes - so do your homework and work out if it’s the best solution for you. What you may find reassuring is some of these schemes are regulated by the FCA (Financial Conduct Authority) and come with additional benefits such as critical illness cover. Canopy’s deposit alternative product is regulated by the FCA and is in fact the only product in the market currently that protects you, the renter, as well as the landlord. For more details about the Canopy deposit free renting product, click here.

Since the introduction of the Tenant Fees Act, agents and landlords offering deposit alternatives must do so as an option only. So the choice is yours, you can, if you wish, choose to use a traditional tenancy deposit system. 




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