Deposit: How Does it work?

by | Sep 29, 2022

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Introduction

For an average 22-year-old, the minimum wage in the United Kingdom is about £9 per hour. In comparison to 2010 when it was about £6 per hour, there has only been a slight increase.

However, in the last 12 years, the world has progressed significantly, and the prices have hiked tremendously. A worker who could easily change his housing in 2010 would have to do a lot of calculations to even think of the latter today, as a deposit alone has become quite stiff.

The real estate and housing sector have seen a massive boost in their market value. Thus, land, construction, and even the rented sector have become unaffordable for many. Yet, a minimum wage worker can only afford to rent a place out of all available options. 

For rental housing, you sign the contract, pay a security deposit and then pay a fixed monthly rent. However, to initiate such a process, it is crucial to know what a deposit actually is – since it is the very first step on the ladder.

For more details regarding the rental procedures, click here.

What is a deposit?

In financial terms, a deposit is simply defined as a transaction where money is transferred to another party subject to an agreement. 

For example, transferring money to your bank account for saving is also referred to as depositing money. The deposit protection limit for banks in the United Kingdom is set at 85,000 pounds. 

The country also has its own deposit protection rules

Often, a deposit is required by landlords to initiate a rental lease or agreement. In addition, it has now become quite common for landlords to demand 1-2 months of rent in advance. This usually happens when the landlord observes an issue with the credits or the tenant’s references. However, paying rent in advance has no harm as you only pay for the following months.

What is the amount of the deposit?

The monetary amount of the deposit varies from country to country and from state to state. In the rental sector, laws that govern your area decide the monetary value a tenancy deposit is worth.

Similarly, for other forms of deposit, such as those paid to the bank – the amounts vary from contract to contract and from place to place.

Tenancy Deposit and the rental sector

The whole concept of rental sectors is based on the lease signed by the landlord and the tenant. It decides the monthly or annual rent, the fixed deposit, its own date of validity and any other conditions put forward by both parties. 

The landlord often shows the tenant Proof of ownership of the property in the form of Property documents, and then the appropriate steps are taken. Other demands or expectations are often stated in the social housing white paper.

The fixed deposit is paid at the beginning when a contract is initiated between the landlord and the tenant. This security deposit is the amount of money held by the landlord till the contract holds validity. 

It mainly serves to be used as the payment for any damages or harms brought to the property by the tenant till the end date. Some amount from this deposit is taken if there are any severe damages towards the end of the lease. However, landlords should remember that they cannot charge the tenant for ordinary wear and tear as slight damages are inevitable with time.

tenancy deposit sign rental sector

What is the amount of the security deposit in the UK?

The security deposit paid at the beginning of a tenant’s lease usually equals 4-5 weeks’ rent or a month’s rent. However, if the annual rent exceeds £50,000, the deposit can legally increase to 6 weeks’ worth of rent.

As a national of the United Kingdom, it is illegal for a landlord to charge a tenant more than this amount. Such actions can lead to severe consequences, as they go against the law.

Therefore, if your landlord forces you to pay a deposit worth more than 4-5 weeks’ rent (6 under the above-specified circumstances), or you have already paid one – you can get advice from a lawyer or the citizen portal about what your next step should be. 

When is the deposit returned?

When the lease or the rental agreement expires and the tenant is looking forward to moving out, the landlords are required by law to return the amount paid to them initially as a security deposit.

This deposit is primarily meant to protect the landlord from the hefty costs of fixing any damages caused by the renter. If the tenant has fulfilled all terms of their end of the lease agreement and has not caused any significant damages, they are entitled to receive the deposit back.

Therefore, the tenant must keep the rented place in good condition to receive the whole amount back.

Also, there is no fixed date or period that decides the time by which this should happen. Individual state laws decide how soon the landlord has to pay back the deposit.

However, some occurrences might make you question if the “landlord can keep my deposit“.

If a landlord refuses to cooperate even after the tenant has done everything that makes him/her eligible to receive the latter, including giving the property manager a date of their move-out – he/she has the right to take them to the small court.

Do you “deposit” or “make a deposit”?

In finance terminology, the word deposit refers to a transaction where money is transferred to another party as a security fee subject to an agreement. 

Some examples would be depositing money at the bank or the security deposit paid to landlords when a lease is initiated. 

However, the term deposit alone differs in meaning from the term “make a deposit“.

The word deposit cites that a certain ‘amount’ is being deposited elsewhere. On the contrary, to “make a deposit is to pay or submit this amount to the other party or association.

Therefore, if we talk about a landlord and tenant’s lease agreement, the tenant “makes a deposit to the landlord worth the monetary amount of the “deposit“. 

tenancy agreement sign

What is a Deposit Scheme?

In banking, deposit schemes refer to the ‘accounts’ at the banks where a customer’s money is held. Often, banks charge customers receiving this service, while others also launch interest schemes where the customer is paid interest depending on the monetary value of the funds in the account.

However, the situation in the rental sector is quite different. The tds deposit schemes here ensure that the tenant receives their security deposit back at the end of the lease agreement.

This deposit scheme, however, works in favour of both: the landlords and the tenants. While it protects the tenant and guarantees the return of the security deposit to them, it also schemes other parties’ protection. It ensures that the deposit is only returned when the tenant has paid all the rent and bills, has abided by all terms and conditions of the tenancy agreement, and has not caused severe damages to the property – besides the ordinary wear and tear.

Further details are available here.

Substitutes of Deposit schemes

The landlord or the letting agents often propose the option of paying some extra money instead of a deposit. This amount can vary significantly with different proposers. For example, one landlord might ask you to pay an amount less than your deposit only once, while another may ask for even smaller amounts, in addition to the rent you pay each month.

Therefore, these substitutes to the deposit schemes can either be one-time payments or multiple ones stretched over a period of time. Such an offer is often referred to as a deposit replacement scheme or a zero deposit scheme. 

Many people tend to go forward with them, considering the lesser monetary amount they will be subjected to pay. However, this might not be the best option always.

These payments are not a deposit, so neither will the tenant get them back at the end of the lease nor will these constitute any damages to the property. Consequently, at the end of the rental agreement, if the property is subject to any repair, the tenant will have to pay for it out of pocket.

To summarise the entire concept, such substitutes are only extra payments the tenant will pay to the landlord. A better option would be a deposit scheme, provided that the tenant keeps the property in good condition.

end of tenancy keys return

The government of the United Kingdom has ordered landlords to put the deposit they receive during the beginning of a lease into a TDP (tenancy deposit protection) scheme. This has to be done within 30 days following the return of the deposit.

Regardless of the type of tenancy, a landlord is offering or the Letting type a letting agent offers, any person who practices corporate let is subject to this legal requirement. 

The only exception to this is when the tenant submits some other valuable item instead of monetary submission as a deposit. In such a case, a deposit scheme is not required.

For further information, click here.

How to calculate rental deposit

In the United Kingdom, the tenancy deposit amount depends on the tenant’s annual rent. If the annual rent is less than 50,000 pounds, the deposit equals 4-5 weeks’ rent or a month’s rent.

On the contrary, if the annual rent exceeds 50,000 pounds, the deposit can legally be charged up to 6 weeks’ worth of rent.

However, it is illegal for a landlord to charge a tenant more than this amount. If they do so, they will be held accountable by the law.

What deposit would be charged to rent a flat?

A tenancy deposit in the United Kingdom is usually charged at a month’s worth of rent. 

Therefore, if your monthly rent is about £900, the monthly deposit would be the same. Even if you pay annually, the calculation stays the same. For example, for an annual rent of £30,000, the deposit would be about £2500.

Paying the deposit when entering property

Can landlords ask for advance rent?

Legally, landlords in the UK are eligible to ask for advance rent payments. They often ask for the first and the last month’s rent in advance, along with a fixed deposit

Generally, there is no legal limit placed on the limit of months the landlord can ask an advance payment for, but usually, landlords keep the limit low to attract more tenants. 

Few tenants prefer to make annual payments, while others like to do it twice a year – every six months. However, minimum wage workers often look for places where landlords only charge monthly. 

However, while the law permits them to do so, it is illegal for the landlord or the letting agent to disguise any extra payments with the advance. Such an occurrence can be reported to the authorities.

Conclusions

When people look out for places to rent, whether apartments, flats, or houses, the conduct, and etiquette of a landlord are one of their topmost priorities. No one wants to deal with a landlord who would bug them 12 hours a day for something less substantial.

The best way to attract more tenants is to let your conduct reflect your sense of responsibility. When drawing agreements, one should look for conditions that suit the needs and comfort of both parties. 

Similarly, as a tenant, when you are looking out for places to rent, make sure you choose a landlord whose Property Planning and property handling skills are tremendous and based upon the class use order.

This can be accomplished by making comparisons of the following:

Now, you have substantial information as to how a deposit works. Renting out a suitable place for yourself would now become much more manageable.