What is a tenancy deposit?
There are actually two types of deposit a tenant is asked to pay, in cash, when they want to secure a rental property. Landlords – or the letting agent instructed on their behalf - are legally entitled to request both of the following:
1. Holding deposit
A holding deposit is taken to reserve a property – it’s a single payment that can be shared between every tenant listed on the tenancy agreement. The payment of a holding deposit shows that the tenant is serious about reserving the property.
Once a holding deposit is paid, the tenant has 15 days in which to enter into the tenancy agreement. When the agreement has been signed, the holding deposit is either taken off the security deposit or it is taken off the first months’ rent, whichever the tenant agrees. If the tenant fails referencing or changes their mind about the property, the landlord is within their rights to keep the deposit.'
2. Security deposit
A security deposit is supplied by the tenant at the start of a new tenancy. This sum of money is there for the landlord to use if there is any tenant-inflicted damage to the property or unpaid rent. Paying a security deposit, in theory, should encourage a tenant to look after the property and pay their rent on time, or they risk forfeiting their money.
Deductions & damage
As well as to pay for any missed rent payments, a landlord will use the inventories at the start and the end of the tenancy to assess what, if any, damage has occurred during the tenancy. Any damage that falls outside of the landlords’ responsibility, or isn’t a result of fair wear and tear, should be paid for by the tenant.
The landlord, or their letting agent, will produce a list of deductions for the damage. This amount will be deducted from the security deposit so the landlord isn’t out of pocket. Any deposit remaining after deductions is then repaid to the tenant.
If there is no damage, the tenant should get their deposit back in full. If the landlord and the tenant disagree on the matter of damage deductions, they can use a deposit resolution or mediation service offered by either The Property Ombudsman or provided by the tenancy deposit scheme used (covered later in this guide).
Deposit caps explained
Up until fairly recently, the landlord or the letting agent used their own discretion when deciding how much security deposit a tenant should supply. This led to varying amounts being requested and some sums were deemed unfair.
As a result, a security deposit cap was brought into effect from 1st June 2019. Landlords and letting agents in England are now limited to taking 5 weeks’ worth of rent, where the rent is equivalent to less than £50,000 per annum. This cap rises to 6 weeks’ worth of rent where the annual rent is more than £50,000. Both caps apply to new and renewing tenancies. There is also a limit on how much a tenant can be charged for a holding deposit - this is capped at one week’s worth of rent.
Where does the deposit money go?
Tenants who have signed an assured shorthold tenancy – the most common type - receive Government-backed deposit protection as it is now mandatory to lodge each deposit with an approved provider. This ensures deposit funds are not misused inappropriately, and can be returned quickly and fairly to tenants.
Landlords and letting agents can choose to transfer the deposit funds to an approved deposit protection provider (custodial protection) or they can keep hold of the deposit in a separate account but have the sum insured (insured protection).
A landlord or letting agent must register a tenant’s deposit in one of three approved schemes within 30 days of receipt – any eviction process will not be valid unless the deposit is protected in this way. The tenant must also receive, in writing, details of which scheme has been used, together with how much the deposit was for, details of the deductions process and what to do in the event of a dispute.
The three Government-approved tenancy deposit schemes are:-
Deposit Protection Service (DPS)
What if I don’t have funds for a deposit?
There are a number of reasons why tenants wouldn't have the funds for a deposit, such as not receiving their deposit back from a current rental or physically not having the upfront cash to pay. Not being able to afford a deposit isn’t surprising - after all, the average deposit is now in the region of £5,000.
There is good news for those who are struggling. There are a number of deposit-free schemes available to landlords and letting agents, allowing tenants to secure a property without having to put down a substantial cash deposit.
At the end of the tenancy, there is no deposit to return and the tenant will only have to pay for any damages they are liable for. Many landlords, tenants and letting agents agree that properties can be let faster using deposit-free alternatives as there is much less administration involved.
Tenants still have to pay at the start of a tenancy but the sums involved are much smaller. Instead of paying 5 or 6 weeks’ worth of rent, a tenant will pay 1 weeks’ worth of rent, a small admin charge and sometimes an annual subscription to buy a guarantee. This guarantee is essentially an insurance plan that offers landlords protection, replacing the security of a cash deposit.