How do tenancy deposit schemes work?

How do tenancy deposit schemes work? [Photo: -Oxford- via iStock]

Tenancy deposits have become something that tenants simply see as part of the reality of renting a home over the last few years, particularly since they have become a legal requirement of the private rented sector. However, despite the fact that all new tenants are having to pay a deposit before they move in - normally amounting to around six-weeks worth of rent - the majority of people are still not all that clued up on how the schemeswork. 

For example, did you know that landlords have a legal obligation to have the money secured throughout the tenancy, or that there is an official route for disputing any deductions from your deposit at the end of your tenancy?

Here, we take a look at the deposit protection schemes, and all that tenants need to know before they pay a deposit on a new rental property. 

Deposit protection

In 2007, the government brought in a new change to the rental market that meant all deposits paid by tenants in the private sector had to be protected under a government-approved scheme. In England and Wales, if you are renting a property, your deposit should be protected under one of three schemes;  the Tenancy Deposit Scheme, MyDeposits and Deposit Protection Service.

Your landlord or letting agent should also let you know which of these schemes they are using. If you have not received details within 30 days of your payment being made, get in touch with the landlord to make sure your deposit has been correctly protected. It is a legal requirement that they let you know. 

Where is your deposit?

As well as knowing what scheme is being used to protect your tenancy deposit, it's important that you know how it is being held. In England and Wales, there are two methods of protection, known as custodial and insurance schemes. 

Insurance schemes are the rarer of the two, and see the landlord pay a fee to make sure the deposit is protected. They keep the money in their own account throughout, allowing them to accrue any interest, and deal with the tenant directly when it comes time to move out. 

The more common method of protection is known as custodial. In these schemes, landlords and letting agents see the money from a tenant held in a secure account. This means that neither landlord nor tenant has access to the money at any time until the tenancy comes to an end, at which point the landlord can authorise the payment be released to the tenant, minus any deductions. 

Deposit deductions

For any number of reasons, there are times when a tenant moving out will not receive all of the money they put down as a tenancy deposit. In these cases, deductions are often made for things like damage, loss of property, unpaid bills or professional cleaning. 

However, tenants should know that they have the right to dispute these deductions under the deposit protection schemes. If a landlord says they are taking money off for damage to something the tenant knows they didn't damage, they can provide evidence to a third-party mediator, who decides whether or not the deduction is fair. 

Arguing against a deduction can increase the time it takes to get any of your money back from your tenancy deposit, but it's important for tenants to know that they do have a vehicle for challenging rulings to protect their money.