Paying a deposit is an important part of buying a property, but what do you need to look out for?
A deposit is an amount you pay upfront as an initial contribution when buying a home. A typical home deposit is 20 percent of the purchase price of the property, but some lenders allow smaller deposits. The balance is provided by a home loan from a lender, and the buyer agrees to pay back this balance with interest over a specific period of time, typically 25 to 30 years.
We answer some of the common questions clients ask when it comes to deposits:
- Will the buyer lose their deposit?
- Should you pay a deposit before exchange?
- Why is exchange so important?
- When is a contract exchanged?
- How much deposit should the buyer pay?
- Who does the buyer pay the deposit to?
Will the buyer lose their deposit?
Every buyer asks this question. The answer depends on whether or not contracts have been exchanged.
If contracts are unexchanged, the buyer will not lose the deposit if they decide to withdraw their offer. However, the buyer risks someone else buy the house. That’s something I’ll explain later in this video.
If the buyer has exchanged contracts, but then decides to withdraw from the purchase during the cooling off period, they will lose 0.25% of the purchase price.
So on a $600,000 house the 10% deposit is $60,000. The 0.25% amount is $1500. If the buyer pays the full 10% deposit to the agent but then withdraws during the cooling off period, they would only lose $1500 and will be refunded $58,500.
The advantage of exchanging contracts though is no other offers can be accepted. The property at this point is off the market. Therefore if you’re the buyer, you need to ask yourself this question:
Would you rather lose the deposit or losing the house?
While ever contracts are unexchanged, the agent has the legal right to show the property to other buyers and that can result in someone else buying the property.
Should you pay a deposit before exchange?
The answer to that question is ABSOLUTELY and the reason for that is without a deposit being paid, contracts cannot be exchanged.
Why is exchange so important?
No matter what anyone tells you, exchanging contracts is the only way to stop anyone else from buying the house you want.
Real estate agents will not hold the property just because you had an offer accepted. They won’t even hold the property for you if you put down a deposit!
When is a contract exchanged?
For a contract to be exchanged, several things need to occur:
- A deposit needs to be paid by the purchaser to the real estate agency
- Two contracts need to be signed – one by the buyer, also known as the purchaser, and one by the seller, who is referred to as the vendor
- The purchaser needs to authorise their legal representative to send the contract for exchange. So expect a call, email or txt from your legal representative asking you to authorise the exchange. This is a very important part of the process
- Once authorised by the buyer, the contract is then emailed to the vendor’s legal representative who will then exchange the contracts.
How much deposit should the buyer pay?
The minimum deposit that must be paid is 0.25% of the purchase price.
On a $600,000 property, the buyer would need to pay a minimum deposit of $1,500.
After contracts are exchanged on a residential property, the buyer will have 5 business days to pay the full 10% deposit unless their legal representative instructs them differently.
If the buyer doesn’t have the full 10% deposit, they may have to organise a deposit bond with their lender.
Who does the buyer pay the deposit to?
All deposits are paid to the real estate agent. Ask them for their trust account details and do a bank transfer.
If you’re transferring the deposit via the internet or your bank’s app, make sure you increase the limit so you can transfer the higher amount.
I hope that helps answer a few of your questions regarding the deposit and exchanging contracts.
As you can see, there’s a lot involved in buying a new property. Getting contracts exchanged is the most important part. Without it, a buyer can miss out on a property. Without the deposit, it’s impossible to exchange contracts.
So get that offer accepted and pay the minimum deposit as soon as possible.
About RM Property Conveyancing
We offer expert conveyancing for property buyers and sellers across Newcastle, Maitland, Lake Macquarie, Port Stephens, Central Coast and NSW.
Our team of solicitors and licenced conveyancers provide accurate, cost-effective and friendly service. Our app makes every conveyancing transaction simple and stress-free.