Standing orders vs direct debits – what Landlords need to know

Hammock is made by landlords for landlords: we help landlords of all sizes take the stress out of their property finances. Using Hammock, landlords can quickly and easily manage their rental payments and bookkeeping, allowing them to save time and focus on other areas. 

As a landlord, it is vital that you understand when and the amount but also how you are being paid. Here we will compare some of the main pros and cons when taking rental payment by standing order and direct debit: 

What is a standing order?

A standing order is a regular, fixed payment set up by the payer, in this case, the tenant, with their bank via a mandate. The payee, in this case, the landlord, receives a fixed sum on a regular basis paid automatically without any need for further instruction by the tenant.

How to set up a standing order?

To set up a standing order you would need to contact your bank;  this can be done online, over the phone or by walking into your nearest branch. 

How to cancel a standing order?

A tenant can cancel a standing order at any time, to cancel a standing order they can do so by calling their bank, or via online banking. 


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What is a direct debit?

A direct debit is set up by the payee using the payer’s bank details. Once established, the direct debit authorises the payee to collect varying amounts from the payer’s bank account where the payer has received advance notice of the amounts and dates of collection.

How to set up a direct debit? 

Where rent payments are to be made by direct debit this can be set up by the landlord, though the direct debit must also be authorised by the tenant. To set up the direct debit, the landlord will require the tenant’s name and address (linked to the tenant’s account), their bank’s name and address and the account sort code and account number. This information is typically collected by a form which also serves as the tenant’s direct debit authorisation.

How to cancel a direct debit?

Usually, the landlord would cancel the direct debit once agreed with the tenant. However, in a lot of cases, the tenant can also cancel direct debits by speaking to their bank. 

What’s the difference between a standing order and direct debit?

The main difference between the two is who sets the payment up – standing orders are set up by the payer (tenant) and direct debits are set up by the payee (landlord) and authorised by the tenant. This may seem a minor difference but there are significant variations between the two which we will explore below:

Flexibility

The principal advantage of a direct debit over a standing order is the room for ongoing flexibility in payment amounts and times. As long as there is an agreement in advance with the tenant, the amounts and frequency of payments can be controlled by the payee.

This provides landlords with far greater flexibility and control when the terms of rental payments must be varied. This is a critical distinction when the landlord is providing relief to the tenant in rental amounts or timing – a particular interest during the ongoing pandemic – or when additional payments must be sought, such as for extraordinary maintenance. As long as the tenant and landlord are able to agree on the varied terms of the payment, the landlord can make any changes they require to the payment amount or frequency either on a one-off or ongoing basis.

By contrast, standing orders, as they are set up exclusively between the tenant and their bank, offer no flexibility to the landlord. This is not the case for the tenant who would be able to cancel or amend their standing order to suit their needs, notwithstanding any contractual issues this would cause.

Reliability

While direct debits offer an advantage in terms of flexibility, standing orders are considered the more reliable method of payment collection. Where the tenant possesses the means to pay, rental payments set up by standing order are never late and can be relied on by landlords. Landlords can also set up notification alerts when a standing order payment is missed, as this is indicative of a serious rent collection problem.

When a notification is received the landlord can take immediate action without wondering whether there is an issue on their side, as the problem inevitably rests with the tenant.

When payments are collected by direct debit it can be less clear where the problems lie when collection issues arise. Late payments could be caused by default on the tenant’s end, the less precise nature of direct debit payment timings or by issues in the collection of the debit by the landlord. The landlord will therefore have more investigative work to do when a direct debit isn’t paid to find where the issue lies, which is a problem for those with busier schedules.

None of the above impacts the tenant’s ability to cancel a direct debit or standing order on their account at any time.

Burden  

Time is precious (in fact, we created Hammock to help landlords save both time and money).

There is no doubt that in terms of ongoing burden, standing orders require much less maintenance than direct debits. As long as the tenant can be relied upon to establish the standing order at the outset of the relationship, the only ongoing burden on the landlord is to check that payments are coming in as agreed and respond where they are not. Further, the ongoing “checking” aspects can easily be automated to ensure that payments are being made in full subject to agreed timelines.

Direct debits, by contrast, require the landlord to check the amount being debited every time payment is to be collected. Though generally little or no change will be made, the burden remains on the landlord to ensure they are debiting accurately. As a result, debiting tenants accounts is only a viable solution to full-time landlords able to dedicate their time to their obligations, or to institutional landlords with resources dedicated to rent collections. Any issues debiting tenants accounts will both cause practical challenges and sour the relationship.

Consumer protection

Direct debit payments are protected by the Direct Debit Guarantee.

If a change in the timing or amount of a direct debit payment is made without being properly communicated to the tenant, the landlord is liable to refund at least the amount debited. If the financial ombudsman finds in the tenant’s favour, the landlord will likely be instructed to refund more than the relevant payment, including any resulting charges suffered by the tenant as well as compensation for time and stress. While this would not impact the tenant’s obligation to make all agreed future rent payments, this could quickly create a hassle for the landlord and negatively affect landlord/tenant relationships.

Conversely, standing orders offer no special consumer protections, as they constitute a decision made at the payer’s discretion to pay a fixed amount on a regular basis. That is not to say that landlords should turn a blind eye to any overpayments by their tenants, but where amounts are incorrect this is purely the responsibility of the tenant where payment is made by standing order.

Which rent collection method should you use?

Landlord Priority Standing Order Direct Debit
Flexibility
Reliability
Burden
Consumer Protection

Standing orders are much more typical as generally rental payments are fixed, regular and, from the landlord’s perspective, there is far less downside risk when the payer is instructing payment. There is a simple reason for this: for the majority of landlords, standing orders are the form of payment that best suits their needs. Debiting tenants accounts creates risk for the landlord and places the onus on them to ensure payments are collected correctly.

Standing orders allow the landlord to smoothly collect rent and ensure they can react quickly and confidently to a missed payment.

However, institutional landlords with the ability to take payment by direct debit can obtain practical benefits where there is a particular need for flexibility.

For these reasons, we would generally recommend landlords collect rental payments by standing order except where their particular business model and scale allow them to dedicate the necessary resources to collections that will offer an advantage by debiting their tenants’ accounts.

For more information or if you have any questions just hit the chat button in the bottom right corner of your screen or email us at [email protected].

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