Your house deposit is probably the biggest block of savings you’ll ever hand over in your lifetime.
It’s natural therefore to want to understand exactly how and when to pay it, and what comes after.
When to pay the deposit on a property
The time to cough up the cash for a property deposit depends on the type of the sale.
For a private sale (also known as private treaty), the buyer needs to pay a deposit to the seller or the seller’s real estate agent after the property’s sale contract (which specifies the offered price for the property, the date of when the deposit will be paid and the settlement date) has been signed off by both buyer and seller. It’s an exchange that can take time to organise, so buyers are often afforded several days to arrange the payment.
For property purchased through an auction, the contract must be signed immediately after the fall of the hammer, so the deposit is expected to be paid on the day. Before most auctions, it is standard practice for the agent or their representative to inform prospective buyers what the required upfront deposit is, as one of the standard terms of the contract of sale. This deposit is typically at least 5-10% of the winning bid.
Keep in mind that while the seller may be satisfied with a deposit of 5-10%, your lender may charge you Lenders Mortgage Insurance for having a deposit that’s under 20% of the property valuation or sale price (whichever is lower).
Don’t forget, a house deposit does not include other costs such as stamp duty, conveyancing, registration fees and inspection costs, so you’ll need to have enough funds aside to cover those expenses.
What is a holding deposit?
A holding deposit is a portion of the full deposit that buyers pay as part of their offer to signify their serious intent to buy the house, however the seller is still free to consider other offers. These deposits are typically 0.25% of the offered price (this varies by state).
Unlike the full deposit you pay after the contract has been signed, a holding deposit does not guarantee that the house will be yours.
Holding deposits can be fully refunded if the seller accepts a separate offer (i.e. you were gazumped) – it’s important to get a written confirmation of this from the agent. There are no refunds for other costs incurred though, such as conveyancing fees, valuation fees and inspection costs.
Real estate agents often request holding deposits from buyers, but they are not compulsory. While they can make you stand out from other prospective buyers, there’s a danger that the agent will use your holding deposit as a bargaining tool to secure a higher offer from another buyer.
How property deposits are paid
Housing deposits are paid to the property’s seller, not the home loan lender. Payment of the deposit can be made in a variety of ways:
- Personal cheque: A personal cheque is written by the buyer for funds to be drawn from their personal account.
- Bank cheque: A bank cheque is issued by a bank, with the funds drawn from the bank’s own account. A buyer will have to pay a fee to the bank for a bank cheque to be drafted.
- EFT (electronic funds transfer): An EFT is simply an online transfer of funds from one bank account to another. Don’t forget that many accounts have a daily transfer limit that you’ll probably have to increase to allow the transfer to take place.
- Deposit bond: A deposit bond is an instrument issued by an insurer which guarantees the seller that the deposit will be paid on the settlement date. If the buyer is unable to pay the deposit on settlement date, the insurer will cover the seller for the full value of the payment. Deposit bonds are common in off-the-plan purchases and with investors whose funds are tied up in illiquid assets. Some sellers may not accept deposit bonds, since they may need a deposit instantly to enable the purchase of their next home.
Agents are unlikely to accept a housing deposit in physical cash, because it’s inconvenient and risky – not to mention suspicious. (Sorry Walter White, but you’ll probably have to leave those fat stacks buried in the desert).
It’s worth checking with the agent about which payment method is preferred.
Given that auctions require a deposit paid on the day and the fact that banks are closed over the weekend (when most auctions take place), bank cheques or deposit bonds need to be pre-arranged – requiring buyers to estimate what their maximum bid would be. If their successful bid is less than this max, it just means there’ll be a larger deposit in the property, making the LVR (loan-to-valuation ratio) lower.
Personal cheques are comparatively easy to use for a house deposit in an auction, since an exact amount can be written in your chequebook as soon as the winning bid is confirmed. You may need to have personal identification with you though.
In a private sale, you can get your conveyancer or lawyer to outline in the contract the conditions under which the deposit is refundable during a cooling-off period (e.g. you can’t secure financing or your partner doesn’t agree to it). This creates a clause that allows you to get most of your deposit back if you decide to not go through with the purchase.
That’s right, most of the deposit, not all. Depending on the state or territory, you may have a financial penalty deducted from your deposit if you cancel the contract during the cooling-off period. This penalty is often the size of a holding deposit – such as 0.25% of the purchase price in NSW or QLD.
After the deposit is paid
After the contract is signed and the deposit is paid, the money is typically held by the agent in a trust account until the property’s settlement day – when the ownership officially passes from the seller to the buyer.
Contracts are legally binding after they’re signed, although for private property sales there may be a cooling-off period for the buyer. A cooling-off period is the time during which a buyer is allowed to cancel the contract and get their deposit refunded. Ordinarily, there is no cooling-off period for buying at an auction.
If the property’s state or territory has a cooling-off period, this begins after the contract is signed by both parties. Correct at the time of writing, these are the different standards around the country regarding cooling-off periods for private property sales:
|State||Cooling-off period||Financial penalty for cancellation|
|NSW||5 business days||0.25% of purchase price|
|VIC||3 business days||0.20% of purchase price|
|QLD||5 business days||0.25% of purchase price|
|SA||2 business days||Up to $100|
|ACT||5 business days||0.25% of purchase price|
|NT||4 business days||0.20% of purchase price|
After a cooling-off period has passed, property sale contracts become unconditional. Cancelling an unconditional contract can have severe ramifications, so talk to a lawyer before you consider doing this.
You may need to consider taking out home insurance for the property immediately after the contract date. In some states and territories, the risk of damage to the property passes from the seller to the buyer on the contract date – not the settlement date. Each contract can be different, so be sure to check yours to find out exactly when you become responsible for the property. Keep in mind that some lenders insist that home insurance is taken out on the property as soon as the contract is signed.
On settlement day, which can be over a month after the contracts were first signed, the buyer’s conveyancer/solicitor meets with the seller’s conveyancer/solicitor and a representative from the bank to exchange contracts and finalise the transfer of the remaining sale funds. After that, the buyer will be notified that they can pick up the keys from the real estate office and start paying off that mortgage!