Nil deposit schemes – a new era for the rental market?

Research from the Centre for Economics and Business Research has shown that the cost of the average rental deposit is expected to rise 40% in the next decade, representing about 70% of the average monthly salary. 

For tenants, this is becoming a problem. Not only are significant funds tied up for the length of the tenancy, but often a second deposit must be put down before the first is given back. 

Therefore, it’s no surprise that the arrival of nil or zero deposit rental schemes have piqued tenant interest. Paying a small fee that enables you to avoid finding and committing large sums of cash is incredibly appealing for many. 

However, it shouldn’t just be tenants who are looking for an alternative, but letting agents too. The deposit affordability problem for tenants in turn leads to a letting agent problem, as it restricts the flow of the lettings market. 

Equally, in the face of a blanket letting agent fee ban, deposits are set to be costly for agents. Administering them is time consuming, and agents must pay to access existing schemes. 

In the past 12 months, the industry has seen the launch of numerous nil or zero deposit schemes, in which tenants pay a small fee to the scheme, often a week of rent, in return for an insurer taking on the liability for landlords. 

Tenants are still liable for rent arrears and damage up to the normal value, but this is recovered by the insurer directly from the tenant. 

As an alternative deposit scheme much has been written in the press of the benefit for tenants, but what do letting agents stand to gain? 

Currently, administering a cash deposit costs letting agents money, through fees to the deposit schemes and time spent dealing with disputes, deductions and repayment of deposits – money that can’t be recouped post the ban. 

Through the right scheme agents can not only win back time but also gain a new revenue stream by taking home a percentage of the premium. This again provides a buffer against the revenue loss expected from the imminent removal of agent fees. 

Another key factor not to be overlooked is the fact that agents are able to offer tenants an attractive USP that acts to speed up the application process, and therefore shortens void periods where the property isn’t generating cash flow.

However, it is also crucial to ensure that the nil deposit schemes are watertight. As a new market, there are still many unknowns and lower levels of regulation. 

For example, if there is an annual renewal obligation, the product is not worth the paper it is written on. If your tenant fails to pay the renewal, both agent and landlord lose their cover. 

It is actually in the tenant’s interest not to renew, as this way they have not paid over any deposit and the replacement deposit scheme will not pay out. 

Replacement tenant deposit schemes must therefore replicate a cash deposit in every way, as otherwise letting agents are exposing their business and their customers to undue risk. 

Always make sure that you are using a provider with a clear track record, and check on details such as excesses and the format of the dispute resolution process. Nil deposit schemes are presenting both tenants and letting agents with an attractive new format, however they must be made to work for all concerned.

Nil deposit schemes are part of a shifting property market, which is evolving under the force of both regulation and changing ownership models. It is estimated that by 2025, over 7.2 million households will be renting. 

Now more than ever, letting agents must treat tenants as consumers and sell them appropriate products to earn income. Landlords are also under increasing pressure, thanks to recent tax changes squeezing the potential to earn positive net yields. Therefore, anything that letting agents can do to reduce void periods and reduce risk will help to retain landlords and attract new customers.

Politically, tenants are a ‘hot’ topic, so any product or service that makes renting a home easier or cheaper will also be welcomed in government, who have been quick to criticise the industry of late.

It is still important that tenants have a choice in which deposit model they want to use, as one size does not fit all. However, I believe that nil deposit models are set to take a big chunk of the market – potentially up to 70% - and going forward will prove to be one of the key products in protecting revenue for both letting agents and landlords.

*Andy Halstead is chief executive of Let Alliance