Landlords face deposit dilemma as government considers future reforms

Thousands of landlords could face a rethink over how they handle tenant deposits if future reforms come into force.

The government has hinted at axing insurance-backed deposit schemes, but the plans are not yet law.

Now industry experts are warning landlords to understand their options and consider the risks before any changes are introduced.

Two types of insurance-based schemes

There are currently two types of insurance-based schemes that work in different ways for landlords and tenants.

Under an insurance-backed deposit protection scheme, a tenant pays a traditional deposit, for example £1,200, while the landlord or letting agent holds the money rather than placing it into a custodial scheme.

An insurance policy is then used to provide protection, such as in cases where the agent is unable to return the deposit. These schemes have historically provided landlords with an alternative route to meeting deposit protection requirements.

Deposit replacement products, such as Reposit, Zero Deposit and Flatfair, work differently. Instead of paying a traditional deposit, the tenant pays a one-off fee or premium. The provider then gives the landlord protection against costs such as damage or rent arrears up to an agreed limit, often linked to the equivalent deposit amount.

While there has been discussion around possible changes to insurance-backed deposit schemes, no new legislation has yet been introduced.

The bigger potential change for the deposits sector is expected to come through the government’s review of the tenancy deposit system, which is due to begin during 2027.

Propertymark is urging landlords to start preparing to understand the different options available to them.

Require landlords to review current arrangements

Henry Griffith, senior policy and campaigns officer at Propertymark, told Property118: “We welcome clarity on the future of deposit arrangements under the Renters’ Rights Act and recognise the importance of ensuring that any changes provide confidence and protection for both landlords and tenants.

“The potential ending of insurance-based deposit protection schemes will require some landlords to review their current arrangements.

“While these schemes have provided a route for some landlords to meet their legal obligations without holding tenant money directly, it is important to distinguish between insurance-backed deposit protection and deposit replacement products.

“Deposit replacement schemes operate differently, with tenants paying a fee or premium rather than providing a traditional cash deposit, and they are not simply a replacement for insurance-based protection.

“For landlords currently using insurance-backed deposit protection, the priority should be to understand how the changes will apply in practice, review their existing processes and consider the options available ahead of implementation.

“This includes looking at the costs, risks and administrative implications of alternative approaches, while ensuring that any arrangements remain compliant with the legislation and provide appropriate protection for all parties.”

Not suitable in every circumstance

Propertymark believes deposit replacement products could become more widely considered by landlords looking for alternatives, but warns that they are not a one-size-fits-all solution.

Mr Griffith adds: “Deposit replacement products may become more widely considered as landlords look for alternatives, particularly where they can help reduce upfront costs for tenants and simplify some aspects of deposit management.

“However, they are not suitable in every circumstance, and landlords should carefully consider factors including affordability, tenant demand, the level of protection offered, fees involved and how disputes and claims are handled.

“Ultimately, landlords need access to a range of compliant options so they can choose the approach that best fits their circumstances.

“Propertymark will continue to engage with the UK government and industry stakeholders to ensure that any transition is practical, clearly understood and supports a fair and effective private rented sector.”

Minor errors have great consequences

It is important for landlords to know that deposit replacement products such as Reposit are separate from insurance-backed deposit protection schemes and will continue to be available.

Reposit believes these products could play a bigger role following the Renters’ Rights Act, as landlords look for ways to manage risk.

Ben Grech, chief executive of Reposit, explains to Property118: “Products such as Reposit are absolutely still permitted and are set to play a much bigger role post-Renters’ Rights Act, not just as a deposit replacement, but as a tool to help agents and landlords operate more effectively in a more complex and compliance-driven system.

“With the shift to rolling Assured Periodic Tenancies and the removal of Section 21, risk has moved firmly towards process and compliance. In this environment, Reposit reduces that risk in a very tangible way.

“Because no deposit is held, the regulations designed to protect tenant’s money being held on account are not required, removing much of the admin and compliance risk at the start of a new tenancy. This becomes particularly important where even minor administrative errors can now have far greater consequences.

“At the same time, Reposit strengthens landlord protection. Landlords are covered for up to eight weeks’ rent, compared to the five-week cap on traditional deposits, providing greater reassurance at a time when regaining possession may take longer and rely solely on Section 8.

“Reposit also enables faster tenant commitment, as paying a one-week fee is quicker and more accessible than a large, traditional deposit, helping agents secure lets more quickly. This also helps to ease affordability pressures for tenants, in a market where there is continued upward pressure on rents.”

Important for landlords to stay informed

A spokesperson for the National Residential Landlords Association (NRLA) told Property118 that until any further changes are confirmed, landlords can continue using the deposit arrangements currently available to them.

For now, whilst landlords don’t need to make any immediate changes, it’s important for landlords to stay informed. With no one-size-fits-all solution, knowing the risks and benefits of each scheme will be crucial.