For buy to let investors and other landlords, the deposit that is collected from a tenant provides an essential measure of security against any damage that a tenant might cause as well as a small buffer against unpaid rent. Yet in the past, tenant deposits were often the subject of bitter disputes between landlords and their tenants. Moreover, some unscrupulous landlords routinely kept the money. In response the government introduced rules in 2007 that required that all deposits for rent of up to £25,000 a year should be kept safe by a tenancy deposit protection scheme.
These are intended to ensure that tenants get the money that is owed to them when they leave while also making it clear when the landlord is allowed to retain part or all of the deposit.
There are basically two sorts of tenancy deposit schemes. The first is an insurance-bases scheme, where the landlord keeps the deposit but pays an insurance premium to an insurance company which then promises to repay the tenant if the landlord doesn’t. The second is a custodial, or safekeeping, scheme, where the deposit is handed over to a trusted third-party which holds onto it. At the end of the rental period it then arbitrates and hands over money to the landlord and tenant, depending on how much each is owed.
How much do Tenancy Deposit Protection Schemes Cost?
The cost for these plans ranges from free for the Deposit Protection Service (which uses interest on the money it holds to fund itself) to almost £90 pounds (including joining fee) for My Deposits.co.uk, an insurance-based scheme where the landlord keeps the deposit. If you are just a small landlord holding just one or two deposits then it would probably be worth your while to go for the free safekeeping plan since you would not be losing much interest anyway. The insurance schemes are much better suited to letting agents and landlords with larger portfolios over which they can spread the fixed costs of an insurance plan, which usually has a high joining fee because the insurance company needs to run credit checks.
One can also get discounts on some plans through membership of landlords associations such as the National Landlord’s Association, which owns part of MyDeposits.co.uk.
What other requirements are there?
Landlords also have some other responsibilities and should be sure to follow the rules. The main one is that within two weeks of receiving a deposit they have to write to the tenant explaining exactly where the deposit is held. The also have to give details of the protection scheme they have selected, contact details and information about what tenants can do in the case of a dispute.
What is changing?
Later this year the government will be changing the laws affecting letting agreements where the rent is between £25,000 and £100,000 a year. Once that happens tenant deposits within this new bracket will also have to be protected.
Great info! My question though is whether the new extension to the tenancy deposit scheme also applies to people who have already been signed up on a contract under the old rules. In other words if I’ve already got someone in my flat paying more than £25,000 a year do I have to go and put their deposit into the plan when the new rules kick in?
Thanks again
Hi Carley
Thanks for your kind words. It does seem that indeed the rules will be applied retrospectively. I know that it is a real bummer that they’ve done it this way since a lot of people were getting along just fine under the old rules, but it seems that even if you have been holding a deposit for a couple of years if it now qualifies under the new plan then you have to go out and either insure it or or put into a deposit scheme.
Great post. Did not knew about this new government scheme. Thanks for sharing with us.
I read an article on similar topic & found it very interesting.
http://www.axispropertyinvestment.com/blog-tenancy-deposit-scheme.html