When buying a property in Australia, the deal is regarded as successful once contracts have been exchanged and you’ve paid a deposit on the home.
Property deposits are also meant to protect the sellers. If you can’t fulfill your obligations according to the contract, you could be forfeiting your deposit.
In this guide, you’ll get a comprehensive understanding of how deposits work, how they can be paid, different ways to pay them, and the legal relationship between deposits and a real estate contract of sale.
What is a deposit?
In the legal sense, a deposit is a consideration that passes once a contract is signed and a legal relationship is formed.
There are two types of deposits when it comes to purchasing properties in Australia:
- Deposit where the contracts have a cooling off period - This is commonly referred to as a holding deposit by Agents and it typically 0.25% of the purchase price. While it doesn’t necessarily secure the property for you until you sign the contract, this deposit shows you’re serious about the purchase. The deposit is not refundable if you cool off during the cooling off period.
- Deposit - A home deposit is legal and compulsory once the buyer and seller have exchanged contracts. It is usually 10% of the purchase price inclusive of the holding deposit.
Every state in Australia has its own set of laws and regulations around property deposits. In NSW, you can find these laws in the Conveyancing Act 1919 No 6.
What is the standard deposit amount when buying a property?
In NSW, the deposit is usually 10% of the purchase price. However, the percentage can vary depending on what the buyer and seller negotiate when signing contracts.
You can lower the deposit amount to 5% based on the deal structure and how you negotiate. You can also negotiate to pay the deposit in stages, especially in private treaty sales.
For example, you can pay 5% when exchanging contracts and the remaining amount on the day of settlement. Similarly, you can pay 0.25% when exchanging contracts and the remaining 9.75% at the end of the cooling-off period.
[.callout] 💡 Anything that deviates from the typical 10% deposit, ensure that it’s in writing in the contract. Don’t automatically assume that the agent will accept a 5% deposit and it’s not in the contract. [.callout]
Then how is this deposit paid?
The most common way to pay the deposit is via EFT bank transfer to the agent’s trust account. until the day of settlement. Once the settlement has been reached, the solicitor will release the funds to the seller.
But remember there are always fraudulent individuals trying to loop you into scams. Always verify the agent’s account details before wiring the transfer. And don’t just do it via email. Call the agent and verify it over the phone.
We’ve heard many horror stories of vulnerable property buyers sending the full 10% deposit into a fake trust account, in such cases it can be very difficult to recover.
Other methods of paying the deposit
Deposit Bonds
This option allows you to guarantee the agent that you’ll be making the deposit on the day of settlement.
To get a deposit bond, you can make an application online, submit it electronically, and also receive it electronically. Make sure you’ve spoken to the property seller before initiating this process to get their approval and ensure that they accept deposit bonds.
Pay special attention to the terms of the contract. If the contract indicates that they can’t accept a deposit bond, then it ceases to be an option.
Home Loan for the Full Purchase
In some cases, you might have obtained a mortgage loan that settles the purchase price in full.
But keep in mind that for this option, you’ll need to obtain a Lenders Mortgage Insurance (LMI). This increases your loan repayment amount and makes it longer to pay off.
On top of that, less deposit means more interest to pay over the loan period.
There’s completely no harm in revealing to the agent that you’re getting a mortgage loan in full. In fact, this can even be helpful when you want to win the deal over other prospective buyers.
Bank Cheque
If you’re attending an auction sale, you can also pay the deposit via bank cheque. You can prepare a bank cheque consisting of 10% of your maximum bid.
If the resulting deposit amount ends up being more than the bank cheque amount and you’ve won the auction, you can pay the balance via bank transfer.
When do you actually have to pay the deposit?
Private Treaty Sales
Private treaty sales typically have a cooling-off period.
In NSW buyers under private treaty sales normally pay 0.25% of the deposit on the day of exchanging contracts and the rest of the deposit at the end of the cooling-off period. The cooling-off period may last up to 5 days after signing and exchanging contracts.
As mentioned before, the deposit in private treaty sales is typically 10% of the property purchase price. Unless you and your lawyer have negotiated a different value, you will have to pay the remainder of the 10% prior to or at the expiry of the cooling off period.
If you fail to pay the deposit as stipulated in the contract then you’re in breach of the contract and the seller has a right to terminate the contract. This could mean you’re liable to forfeit the full 10% deposit.
Auction Sales
For Auction sales, there is a slight difference. If you are successful at the auction, you are required to pay the deposit immediately after the auction finishes.
[.callout] 💡 Don’t ever go to auction without negotiating the contract first [.callout]
Beware of attending a property auction without talking to us. If you went to an auction and won, you can’t negotiate.
The contract terms are as is. You don’t get a chance to negotiate the deposit and lower it to, say, 5%. You’ll have to pay the 10% and if you can’t, you’re in breach. If this happens, you lose the 10% in full.
If you need to negotiate a lower deposit amount, then you should negotiate before attending the auction. And it should be early enough so that you can also receive a response before the auction date.
What if the agent tells me to pay the deposit before the exchange of contracts?
There is no legal requirement of the buyer to pay the deposit before you exchange contracts in NSW, however, that doesn’t mean you shouldn’t.
Strategically, from a prospective buyer’s point of view, it may make sense to pay the deposit before exchanging the contracts as a negotiation tactic to show that you’re committed to buying the property. However, keep in mind that the property is still on the market until you’ve also exchanged contracts.
Is the deposit refundable?
According to the Conveyancing Act 1919- Sect 55, a purchaser has a right to a deposit refund.
If you’re under a private sale treaty and you decide to back out of the sale during the cooling off period then you are entitled to a deposit refund minus the 0.25% which is forfeited to the vendor.
The deposit is also refundable to you if the vendor has breached the contract of sale. Some examples of such breaches include:
- Failure to include items in the vendor disclosure documents: Property sellers are required by the law to disclose certain matters about the property in a contract known as the prescribed documents. Failure to disclose the prescribed documents may entitle the buyer to the deposit.
- Their title is found defective: Failure to deliver a clear and unencumbered title at settlement
- Failure to comply with notice to complete: If the vendor delays settlement and fails to comply to complete the sale
In these instances, property purchasers are able to terminate the contract and receive a full refund on the 10% deposit paid.
When is a deposit not refundable?
In cases where you’ve decided to back out of a sale after the cooling-off period, where the contract becomes unconditional, then the deposit you’ve paid is non-refundable.
The deposit is also non-refundable when you as the buyer have breached the contract, some examples can include:
- Not paying your deposit on time: even if you’re 1 minute late, the vendor has the right to terminate the contract while keeping your deposit in full.
- Not having finance approved: If you are unable to move forward with the sale due to the banks not approving your loan unconditionally
- Backing out of a Section 66w: if you've decided to obtain a Section 66w certificate and you back out of the sale then your deposit is not refundable
Need advice on deposit rules in NSW? Book a free consultation.
Understanding how deposits work is essential for a successful property transaction. Oftentimes, many property purchasers don’t understand their rights and responsibilities when it comes to paying their deposits or retrieving back their deposit.
Engaging an expert Property Lawyer can help keep your rights and best interests protected, and ensure that your property transactions run smoothly. If you require any legal advice regarding deposits on your property, please contact us at (02) 7806 0623 for a free consultation.
