What Are Holding Deposits? An Overview For Landlords

As a landlord, you may ask what are holding deposits, and wonder how holding deposits work. Two common questions our team at The Letting Experts often answer are:

“Why are holding deposits needed?“

“When is a holding deposit returned?”

To help, The Letting Experts team has compiled an overview so you can gain an understanding of holding deposits for landlords.

Holding Deposits Explained

What Are Holding Deposits And Are They The Same As A Tenancy Deposit?

Confusion arises when landlords mistake a holding deposit and a tenancy deposit as the same thing. This isn’t the case. A holding deposit (or holding fee) is money prospective tenants pay when they apply for a rental property.

A holding deposit secures the property and is made before the individual becomes a tenant. Once the holding deposit is paid, landlords are legally obligated to remove the rental property from the market. Legally, a holding deposit can only be the maximum amount of one week of rent. A tenancy deposit differs and is paid before the tenant moves into the rental property. This can be a maximum of 5 weeks’ rent in England if the annual rent is under £50,000. It's six weeks’ rent if the annual rent is over that figure.

A tenancy deposit is placed into one of the deposit protection schemes approved by the government. If this doesn't happen within 30 days of its receipt, landlords may face penalties. Holding deposits are not required by law to be included in one of the deposit protection schemes.

The Tenant Fees Act of 2019 introduced by the government aims to make the private rental market easier for tenants. It achieved this by removing administrative charges and high initial expenses that would often overwhelm first-time renters.

Among the reforms was the adjustment of the amount of holding deposit landlords can request from tenants.

Scotland has different rules, such as the tenancy deposit must be a maximum of 2 months’ rent. While in Wales, the tenancy deposit represents any amount of money held by the landlord themselves or their agent, typically equating to about one month’s rent.

Reference Checks And Holding Fees

Once a tenant has paid a holding deposit, the landlord carries out reference checks. When the tenant passes those checks, the next step is to sign the tenancy agreement and arrange a move-in date. Should the tenant fail the checks however, the amount paid as a holding deposit will come into play.

Can A Prospective Tenant Get A Holding Deposit Back if They Fail Referencing?

Failing the referencing process doesn't automatically give the landlord the right to withhold any sums paid as the holding deposit. However, if the tenant has provided false or misleading information, the landlord has the right to keep the holding deposit. If the tenant doesn't pass the affordability checks, the landlord may still offer a tenancy. In this case, the tenant would need to find a guarantor or pay rent upfront. If the landlord chooses to no longer proceed with renting a property, the tenant will receive their deposit back.

In a similar vein, if the tenant submits their application and progresses to referencing before backing out, retaining the deposit is often the course of action. So, as you have read here, understanding holding deposits is crucial!

When Is A Holding Deposit Returned?

When the holding deposit is paid by the tenant, an agreement with the landlord must be reached within 15 days. If this deadline is not met and the tenant has done all they can to secure a tenancy, the landlord must refund the full holding deposit within 7 days. When everything goes smoothly with the tenant’s application, the tenant will receive the amount of their holding deposit back. This is usually in the form of a deduction from the first month of rent paid.

Are Tenant Fees And Holding Deposits The Same Thing?

Holding deposits aren’t fees that tenants are charged. Rather, they’re safety measures that protect landlords and their agents from any financial losses. A ban on tenant fees enacted in 2019 has caused some confusion about holding deposits. However, since tenants receive back the amount they pay as a holding deposit, it isn’t deemed to be a fee. Therefore, it’s entirely acceptable and encouraged.

Want to Learn More About Holding and Tenancy Deposits?

To find out more about holding deposits, please get in touch with the lettings team at The Letting Experts on 033 33 44 99 15 or email hello@thelettingexperts.co.uk.

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In the meantime, we've answered some of your common questions about holding deposits for landlords.

Frequently Asked Questions About Holding Deposits for Landlords

What's the difference between a holding deposit and a tenancy deposit?

A holding deposit secures the property during the application process (maximum one week's rent). A tenancy deposit protects against damage during the tenancy (maximum 5 or 6 weeks' rent).

Can I keep the holding deposit if a tenant fails referencing?

Only if they provided false information. You can still rent to them with a guarantor or upfront rent.

When should I return a holding deposit?

If an agreement isn't reached within 15 days or the landlord pulls out, the full deposit should be returned within 7 days.

Are holding deposits banned by the Tenant Fees Act?

No, because the tenant gets the money back (usually deducted from the first month's rent). It's not considered a fee.