What is a Tenancy Deposit?

Deposits are part and parcel of renting a home. Almost every landlord in the UK uses them and there’s often no getting around them. But what is a tenancy deposit, what is it for and what are your rights?

These are all important things to know. Before you hand over a big chunk of your money to a landlord, a letting agent or a build-to-rent landlord, you should know:

1. Your rights
2. What that money is for
3. How you can expect to get it back

So let’s explore tenancy deposits, starting with a few definitions.

Tenancy deposit definitions

The first thing to be aware of is that there are actually a two different types of deposits: holding deposits and security deposits.

They play very different roles, and have different regulations surrounding them.

What is a holding deposit?

The first deposit to be aware of is a holding deposit. This is the more straightforward of the two. And, as you may have guessed, a holding deposit is in place to hold the property for you so no one else can take it.

So you view a home, put in your offer and it gets accepted. Then when you pay the holding deposit – and only then – the property will be taken off the market.

So it’s effectively yours from this point, as long as you get through the paperwork.

What is a security deposit?

A security deposit is something very different. A security deposit is an amount of money that you pay to the landlord who then holds it as a security for any damages or missed payments during your tenancy.

It’s almost always collected prior to the tenancy starting, around the same time that you’re going through referencing, finding a guarantor, or completing your right to rent checks.

It’s also a requirement from almost all landlords too. They’re handing over a very valuable asset into your care, often with valuable furnishings too. So they need financial assurance that – if you do burn the sofa – the damage can be paid for.

How much is each deposit?

Tenancy deposits vary in value. There’s a difference in value between a holding deposit and a security deposit, but this will also differ based on the rent too.

How much is a holding deposit?

A holding deposit is typically 1 week’s rent.

It’s a nominal amount that’s not significant, but equally not insignificant. It’s enough to weed out the time-wasters who might back out of the tenancy, but not enough to put off genuine renters who might not be sat on a stack of cash.

How much is a security deposit?

A security deposit is typically 5 weeks’ rent.

Naturally this has to be a bigger amount to cover the higher cost of any potential damage.

If you burn that sofa for example, the cost to replace one could be £500-£1,000. If you break a window, again it could be several hundred pounds.

How do you work out weekly rent?

To work out what 1 or 5 weeks’ rent should be:

1. Take the monthly amount
2. Multiply it by 12 months to get the annual amount
3. Divide it by 52 weeks

So if your monthly rent was £1,820, then your annual rent would be £21,840. So your weekly would be £420.

In this scenario, you would have to pay:

• £420 as a holding deposit to hold the property for you
• £2,100 as a security deposit to cover any damages

How do you get your tenancy deposits back?

As much as you’re asking what is a tenancy deposit, you’re probably also asking how can I avoid paying it!

Well the good news is that this money isn’t lost. Tenancy deposits actually don’t have to cost you a penny.

How do I get my holding deposit back?

The holding deposit almost always goes towards your first rental payment. So if you’ve paid over £400 as a holding deposit and your first month’s rent is £2,000, then you’ll only have to pay the difference – £1,600 – at the start of your tenancy.

Be sure to check this before you pay the holding deposit though! You’ll need to check the terms and conditions to make sure that your money will go towards the rent.

Things get slightly different if your tenancy fails to go through though. If your landlord pulls out for any reason, they should refund you the full deposit (again, check the T&Cs).

If you pull out though – if you found somewhere else, you realise you can’t afford it, working circumstances change etc – then there’s a good chance you lose the money.

And finally, there’s usually a grey area if you fail to pass references. It’s usually at the landlord or letting agent’s discretion. If you never came close to passing then they might view this as a waste of time (and potentially a loss of rental revenue) and may not refund your deposit. But if the inconvenience was low or you came very close to passing, then you should hope that they would do the right thing.

Either way, always be sure of your situation and finances before you press ahead and pay a holding deposit. Especially if you want to reduce the risk of forfeiting that money.

How do I get my security deposit back?

Security deposits are held for the duration of the tenancy and must be returned within 10 days of you both agreeing how much you’ll get back.

Of course, you can only get your full security deposit back if the landlord’s satisfied that they’re receiving the property back in its original condition.

Some damage is obvious; if you break something, leave the place dirty, leave rubbish, or paint all the walls a garish purple, then you’re going to be charged for it.

Common causes for charges on a security deposit include:

• Cleaning costs
• Missed rental payments
• Pet damage
• Broken appliances
• Missing items (refer to the inventory)
• Changes to the property that need to be rectified
• Unpaid utility bills

But different landlords will have different approaches to what is considered wear and tear. Laid back landlords will accept a few scuffs and scratches as fair wear and tear. Whereas more strict landlords might decide to charge you for these.

It’s good practice to talk to your landlord at the start of your tenancy to understand where they stand on damage. If you’re good at painting and won’t make more of a mess, then it might be easier if you splash some fresh paint on the walls before you leave to avoid having to pay to get a decorator in.

And even if they decide to charge you for damage, you can still dispute it. If you can have a reasonable discussion with your landlord then it’s worth doing. They may see your side of the argument and reduce what they’re charging.

But there may be those instances where you have a disagreement. In these events then you can dispute it with the tenancy deposit scheme. They’ll step in, review the evidence and make a final, unbiased decision on who gets what.

The legalities of tenancy deposits

When it comes to tenancy deposits, neither is required by law. But almost all landlords choose to require them because of the benefits and security they bring.

There are legalities that help protect your money. These are different based on the type of deposit.

The legalities of holding deposits

Holding deposits are generally governed by terms and conditions set out by whoever’s collecting the deposit. In other words, the landlord or the letting agent.

So before you pay over any money, make sure you ask about the terms and conditions first. If the landlord pulls out, what happens to your money? If you pull out, what then?

The terms and conditions should answer these questions.

The legalities of security deposits

Security deposits are protected by UK law. Your landlord has to register your deposit with a government-approved tenancy deposit scheme within 30 days of receiving it. These are currently:

• Deposit Protection Service
• MyDeposits
• Tenancy Deposit Scheme

These deposit protection schemes ensure that your money doesn’t disappear without a trace. And they ensure that you have an independent, unbiased third party to act as mediator if a dispute occurs.

Alternatives to tenancy deposits

There’s rarely an alternative to a holding deposit. You usually have to put some money down to confirm your intent to take the property.

Some landlords or lettings agents will do 1 week’s rent, some will take the full first month’s payment. But there’s rarely a £0 alternative.

With security deposits though, there is an alternative: zero deposit schemes.

Zero deposit schemes

Zero deposit schemes are growing in popularity across the market.

What are they? Well, take Flatfair for example. They take a check-in fee of 1 week’s rent instead of having to hand over a couple of grand as a deposit.

So in our earlier example, instead of having to hand over £2,100 as a security deposit, you’d only have to pay £420.

Although it is a lower amount, this fee isn’t refundable. So a well behaved tenant who cleans regularly and respects your landlord’s property, it might be best go for the original cash option.

Many of the build-to-rent brands that we feature on Right Rent now offer a zero deposit option for those who don’t want to hand over a chunk of cash. And many brands are even paying the 1 week’s rent for their tenants to make it a true low cost alternative.

What is a tenancy deposit?

You’ll be better equipped to rent a home now that you know the ins and outs of tenancy deposits. Understanding how they work is vital as they’re core part of the renting process.

So the next time you face a conversation with a landlord or letting agent about deposits, you can confidently navigate the jargon and secure your ideal home on the right terms.