While it’s not a legal requirement to take a security deposit from a tenant at the start of a tenancy, it’s certainly something that’s generally done by the vast majority of good landlords and letting agents.
But although there are good reasons for taking a deposit, there are also some benefits to not doing so.
Here is our round-up of the pros and cons:
Benefits of not taking a deposit
- You may be able to let the property more quickly, as tenants don’t have to save up for a deposit on top of paying their first month’s rent
- You’re likely to attract one of the many good tenants out there who have sufficient income to pay their rent each month, they just don’t have any savings to fund a deposit. This has become a very real problem during the cost-of-living crisis, with a recent poll revealing that nearly a third of renters are having to borrow money to pay for their deposit – many of them using a credit card
- You can save yourself some administration and cost, with not having to protect a deposit, if you generally prefer protecting deposits with an insured scheme
- There is no risk of your tenant taking you to court or you being unable to evict them using a Section 21 notice, due to poor deposit administration
Downsides to not taking a deposit
- When advertising the property, you may get interest from tenants who are less good at managing their finances and are attracted by the cheaper up-front cost
- The tenant may not take care to look after the property as well, without the financial incentive of getting their full deposit back when the tenancy ends
- If the tenant causes damage to the property and refuses to pay for it, or has fallen into rent arrears, you will have no money in hand to fall back on, other than your own
Pros of taking a deposit
- If the tenant has enough ‘spare’ money to invest in a deposit, it suggests if they have problems paying the rent during the tenancy, they may have additional savings to help them through difficult times
- When you protect a deposit in one of the government-approved schemes such as Total Landlord’s deposit protection partner, mydeposits, you are showing the tenant that you’re a good landlord who operates within the law
- Holding a security deposit means your finances are protected to a certain extent when the tenant leaves if repair work is required because of damage they caused
- You have peace of mind that if the tenant defaults on their rent, you will be able to secure at least five weeks’ worth of rental payments (assuming you have taken the maximum deposit amount)
Bear in mind that even if you do take a deposit, it may not be sufficient to cover the cost of damage or unpaid rent, so it’s wise to make sure that your landlord insurance policy covers you for malicious damage by tenants and consider also taking out rent guarantee insurance.
“Most tenants take care of their rental property, but there will always be some that cause damage through carelessness causing accidental damage, and others that do so deliberately, sometimes leading to structural damage costing thousands of pounds to put right. Landlords should make sure they have a comprehensive landlord insurance policy to protect them financially in case their tenants maliciously damage their property, leaving them with a bill that’s far higher than the deposit they hold.”
Steve Barnes, Head of Broking, Total Landlord
“There are alternative products to the traditional deposit which will offer more protection than simply not taking a deposit at all and in every case, proper referencing checks must be carried out. Once you have the referencing report, you have choices on how and whether to proceed”.
“Make sure that the referencing companies you use are recognised by your insurance company if you have a rent guarantee policy”
Suzy Hershman, Resolution Department Lead, mydeposits
For more detailed information and advice on taking and protecting a deposit, see our ultimate guide to tenancy deposit protection legislation and visit our deposit protection partner, mydeposits. And for guidance on lettings laws read our legislation guide for landlords.
