One of the most common questions we get asked about buying property is how deposits work. Read below for our rundown on this very integral part of the property buying process.
What is a Deposit?
In real estate terms, a ‘deposit’ refers to the payment that a buyer will make to secure a particular property, this demonstrates their intention to purchase/own said property.
When in the home buying process do you pay a deposit?
Deposits are paid at the time of signing the contract. They are an upfront payment.
How much is a deposit, generally?
Deposits are usually 10% of the overall purchase price - this is the default rate under the sale contract - however, the vendor (the person selling the property) may agree to a lesser deposit, normally 5%. If you require less than 10% deposit, then it is important that this be formally requested by your legal representative.
What is a cooling-off deposit?
Sometimes vendors will accept a cooling-off deposit which is 0.25% of the purchase price. This deposit is paid where the parties agree to a cooling-off period (the standard is 5 business days) in which time you will obtain your formal approval, negotiate the contract of sale and conduct your inspections such as strata or build and pest.
This deposit is non-refundable.
If at the end of the cooling-off period, you would like to proceed with the purchase, then you will need to top up the deposit to 10% (unless a smaller amount has been agreed) by close of business on the day your cooling-off period ends.
If you are not happy after your investigations and want to cool-off, your legal adviser will need to formally notify the vendor’s legal adviser and you will forfeit the 0.25% to the vendor.
Who do you pay the deposit to?
The deposit will be paid to the ‘depositholder’ (a defined term in the sale contract) which can be the vendor’s real estate agent or if there is no agent involved - the vendor’s solicitor. Meaning, your payment will not go directly to the vendor’s account. The deposit is held in a trust account and will not be released to the vendor until the property settles, unless otherwise agreed between buyer and seller.
How do you pay the deposit?
Whether you are buying a home through private sale or at an auction there are many different ways to make the deposit payment.
- Personal cheque
- Bank cheque
- DEFT - a type of digital payment
- Deposit bond
Let’s break these down, so you know a bit more about what each of the methods entail.
This is the traditional way to pay a home deposit. You write a cheque using your cheque book and hand the payment in, the old fashioned way - on paper! This concept is completely foreign to a lot of people, especially those first home buyers who are more likely to belong to Gen Y. But, don’t worry there are other alternatives.
Bank cheques are purchased from your bank as a one-off and are around $10. Banks will issue these only if you have the specified amount in your account - so the cheque doesn’t bounce. Again, this is a physical payment that is written down on a paper cheque. A bank cheque freezes that amount of money in your account, so it is very important to return the bank cheque to the bank if you are unsuccessful at auction so your funds can be unfrozen!
In Australia, DEFT payments have become a more popular way to pay home deposits and even rental payments. DEFT payments allow you to make a secure payment electronically straight from your account online or over the phone.
Most commonly, in this instance the real estate agent would supply the DEFT reference number (which they get once they are registered with DEFT) to the home buyer. The buyer would then need to log in to the system - very easy to do through a computer or smartphone - and fill in their details. This process is similar to a regular bank transfer and is a great option for those of us without cheque books!
A deposit bond or deposit guarantee is an insurance policy that acts as a guarantee to the vendor that the buyer will pay the deposit at settlement. This is more common when purchasing an ‘off-the-plan’ home (the property is still being built). In this situation, it can give the buyer more time to save for their deposit/more interest to accumulate in their savings account. Sellers need to approve the use of a deposit bond so if you would like to use this option, it is important that your legal adviser checks whether the seller will agree to this.
All these options can be organised prior to you purchasing the property if it is being sold privately. However, it will be harder to come prepared to an auction/s - where you don’t know exactly what the deposit price will be. Therefore, it’s customary for the vendor to accept a cheque that is close to the deposit price in ‘good faith’. You will then need to ‘top-up’ the remainder with another cheque as soon as you can. In any case, you should ask the real estate agent about what payment methods are preferred before the auction.
What happens to the deposit?
This is determined entirely by what has been written in the sale contract. The default position under the sale contract - and what most commonly happens - is that the paid deposit is to be held by the vendor’s real estate agent and placed into an interest bearing account.
What’s the final step?
Following ‘settlement’ (the process that involves the legal/financial representatives of both vendor and buyer to officially sign over the property to its new owners), the buyer will give the real estate agent what is referred to as an ‘order on agent’. This is the technical term for authorising the real estate agent to release the deposit money to the vendor.
Normally, as the deposit has been put into an interest bearing account, the real estate will then give the buyer their share of the interest that has been earned on the deposit money and the rest will go to the vendor - minus, of course, the real estate agent’s commission!
It is integral that both the buyer and the vendor give their tax file numbers to the real estate agent as this prevents the government from taxing 50% of the interest earned on the deposit. This is especially important if you have a long settlement period, for example when you buy ‘off the plan’, the deposit will be held and earning interest for perhaps, a few years.
Have some more questions? We’re happy to help. Get in touch through our contact page.