A Landlord's Guide To The Zero Deposit Scheme

When you are renting a property to tenants, you may come across the term ‘zero deposit scheme’. This could be appealing to some tenants, especially those who are awaiting the return of a deposit from a previous landlord or those on a fixed income. But what exactly is the zero deposit scheme? Is it safe not to take a deposit from tenants? Who covers the cost of any damages or rent arrears without a deposit? In this blog, we will answer all of these questions and provide you with everything you need to know about the zero deposit scheme.

Table of Contents

What is the Zero Deposit Scheme?
Who is Eligible for the Zero Deposit Scheme?
Is the Zero Deposit Scheme Safe?
Is the Zero Deposit Scheme Good For Landlords?
Benefits and Drawbacks of Zero Deposit Schemes

What is the Zero Deposit Scheme?

The zero deposit scheme is an alternative to tenants paying a large security deposit to a landlord at the beginning of a tenancy. The term ‘zero’ is somewhat misleading as a small deposit is taken, but it does represent a more affordable option for tenants. The scheme provider will take a no-refundable fee, often the equivalent of a week’s rent plus any admin or setup fees from the tenant. They may charge the tenant a monthly or yearly fee for this service.

The scheme provider then offers a guarantee to the landlord that they will pay for any damages to the property or rent arrears that would normally be covered by a traditional deposit, thus protecting them against any losses. Any money paid out by the scheme provider will then be recovered from the tenant. Once the tenancy is over, the landlord can make a claim to the scheme provider for any charges incurred. If there are no damages or charges at the end of the tenancy, then the zero deposit guarantee will end, and no further action is required by the tenant or landlord.

The zero deposit scheme is provided by private third-party companies who are normally authorised by the Financial Conduct Authority or FCA. Landlords can offer the zero deposit scheme as an alternative to paying a deposit at the start of a tenancy but cannot force tenants to use one.

Who is Eligible for the Zero Deposit Scheme?

Not every landlord offers the zero deposit scheme; only those who are registered with a zero deposit scheme provider will offer this as an option to prospective tenants. Tenants will also need to pass a reference check and credit check to access the zero deposit scheme. The exact criteria for the reference and credit check will vary depending on the scheme provider. If the tenant does not pass these checks, they could ask someone like a close friend or family member to be their guarantor and cover the deposit for them. The zero deposit scheme is not available for lodgers who stay in the same property as the landlord or anyone renting a property as a company.

Is the Zero Deposit Scheme Safe?

There are several companies that provide zero deposit schemes; most are reputable and offer security to both tenants and landlords, protecting the landlord from potential losses and offering tenants a faster and cheaper way of renting a property. In the case of a dispute regarding the deposit scheme, both parties can use an impartial dispute service such as The Dispute Service, also known as TDS. If you want to offer your tenants the option of using the zero deposit scheme, you should find a scheme provider that is authorised by the FCA and has good reviews from tenants and landlords.

Is the Zero Deposit Scheme Good For Landlords?

All landlords need to keep their tenants’ deposits in a tenancy deposit protection scheme within 30 days of receiving it. Using a zero deposit scheme can save you having to do this. Zero deposit scheme providers also often have impartial dispute resolution services, which can be helpful if any disagreements occur at the end of the tenancy. A zero deposit scheme also means that no proof of deposit is needed if you need to evict a tenant – they cannot claim that their deposit was not protected or that the correct information was not given to them at the start of the tenancy, as the zero deposit scheme is not covered by deposit protection legislation.

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Benefits and Drawbacks of Zero Deposit Schemes

There are a few pros and cons for both landlords and tenants alike of the zero deposit scheme that you should be aware of:

Pros of the Zero Deposit Scheme

Zero deposit schemes make renting a home more accessible for a wider pool of tenants, especially those who are on a low income or receive benefits. Landlords who offer the zero deposit scheme can attract more tenants.
They speed up the letting process, reducing void periods and admin time, which benefits tenants and landlords.
Some zero deposit schemes offer more protection than traditional deposits, offering as much as 12 weeks of rent arrears rather than the 5 weeks that a normal deposit can cover. They may also cover damages or cleaning fees that could exceed the normal deposit amount, which is capped at 5 weeks’ worth of rent. So, if a tenant leaves a property with rent arrears, dirty and damaged, the deposit protection scheme could potentially cover all of this without the landlord having to resort to legal action to claim additional fees from the tenant.
If any problems arise at the end of a tenancy, the landlord can quickly and easily claim the money from the scheme provider, who will then recover their costs from the tenant later.

Cons of the Zero Deposit Scheme

There could be a risk that the scheme provider will not pay out or even go out of business – for this reason, it is recommended to find a well-established scheme provider covered by the FCA.
Offering the zero deposit scheme could attract tenants who are very cash poor and could potentially struggle to pay the rent in the future.
A drawback for tenants is that they can’t claim the money they paid into the zero deposit scheme, even if they never missed a rent payment and left the property in perfect condition.
Another drawback for tenants is that the scheme provider will seek to claim back any rent arrears, cleaning fees or bills for property damage, potentially exceeding the cost of a traditional deposit.

For landlords, offering the zero deposit scheme can open up their options for potential tenants, reduce void periods and save time and money on admin, but there are the above potential drawbacks to consider too. It is worth considering the zero deposit scheme, and if you do choose to offer this scheme, make sure to take the time to find a reputable scheme provider who is covered by the FCA and has a decent amount of positive reviews, especially from other landlords.

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