How to pay a deposit when buying a home
When buying a house, you will typically have saved a deposit. We take a look at what deposits are payable, when, and how you do it.
What is a deposit on a home?
When you are buying a home in Australia, such as via private treaty or at an auction, you’ll probably be required to pay a deposit. The term ‘deposit’ is used in a few different ways when it comes to buying property:
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Home loan deposit
When someone refers to a home loan deposit, this is the money a would-be homebuyer has in cash that they have told their lender they will contribute towards buying the property. The bank then uses this information in assessing the buyer’s loan application.
If the loan application is approved, the lender will typically grant a mortgage (also known as a home loan) to cover the difference between the deposit and the agreed sale price. When the contract is settled, the home loan deposit (minus the contract deposit that has already been given to the seller) and the funds generated by the mortgage are transferred to the seller. The buyer then gains ownership of their new property and starts repaying their mortgage.
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Deposit on a contract
‘Paying the deposit on a home’ could also mean the deposit (or deposits) that a buyer will write down on a contract of sale. This is a portion of the sale price of the property being purchased, and is given to the seller (typically via their agent, solicitor or conveyancer) soon after you both sign a contract.
The contract deposit could be all, or a portion of, the amount of money a buyer has saved up as their home loan deposit. There are generally two types of deposits that may be listed on a contract:
- Holding, partial or initial deposit (not compulsory)
- Full deposit, also called “balance deposit”
It may be a wise idea to become familiar with these terms, as it could help during the negotiation process when buying a home.
Sometimes, buyers may choose to use the size of their holding or full deposit as a bargaining chip to edge out the competition and secure their dream home. But it’s important to remember that even if you do have a large sum saved when you go to buy a home, you don’t necessarily have to put the full amount down as the deposit on the contract. And it could be handy to know that holding deposits aren’t compulsory.
This article is about the two types of deposit that you write down on the contract – holding deposits and full deposits.
To explore home loan deposits further, this article may help: Home loan deposits: What are they and how much do you really need? If you’d like some more background, these stories may also be of interest: How to buy a house; How to make an offer on a house.
Home deposit vs holding deposit: what’s the difference?
The main difference between a home deposit and a holding deposit is that the home deposit is usually compulsory while the holding deposit is never compulsory. A holding deposit is an optional amount of money a real estate agent may ask you to pay – or you may decide to offer to pay – if you express interest in buying a property.
A home deposit, also called a full or balance deposit, is the amount of money that you’re legally required to pay as a home buyer to secure a property that’s available for sale. A home deposit is typically a larger amount (for example, between 2.5% to 10% of the purchase price). A holding deposit is generally smaller. The full deposit is negotiated between you and the buyer. If you do decide to pay a holding deposit as a buyer, the amount is typically negotiated between you and the seller, except for in South Australia where a limit of $100 applies. Both these types of deposits are considered as part of the purchase price (that is, not an extra fee on top of the purchase price).
How can my deposit affect my home loan?
The level of deposit you have saved up can have an impact on the home loans you’re likely to be eligible for and the overall cost of the loan. This is because your deposit amount impacts what’s called your loan to value ratio (LVR), which is the loan amount expressed as a percentage of the lender’s valuation of the property you’re buying. The greater your deposit, the lower your LVR will be, and a lower LVR can be beneficial for a number of reasons, including:
- If your LVR is above 80% you may need to pay for lenders mortgage insurance (LMI) to cover the bank for the additional risk of lending to a borrower with a relatively low deposit.
- A high deposit/low LVR means you will be borrowing less and this generally means paying back less interest to the bank. It may also mean less strain on your finances in the future, particularly in the event that interest rates go up, which can happen for reasons including if the Reserve Bank of Australia decides to increase its cash rate target.
- Your LVR can be part of the eligibility criteria for certain loans and lenders. The lower your LVR, generally the more lenders and loans you will have to choose from, and this can potentially mean having access to lower interest rates.
Let’s look a little deeper into the difference between the two types of deposits.
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What is a holding deposit on a real estate contract?
A holding deposit is an initial (and optional) sum of money that you pay the vendor before the contract becomes legally binding. For example, a buyer might offer one hoping it will give them the edge over the competition if a vendor receives multiple offers (although it’s worth noting that there is no guarantee this tactic will work). It forms part of the full deposit.
How does a holding deposit work when buying a house?
Let’s say, for example, you’ve seen a home you want to buy. You make an offer to the seller, detailing how much you would like to pay for a holding or initial deposit and as a full deposit.
After a bit of negotiating, your offer is accepted. At this point, you would then likely pay the holding deposit.
Regardless of whether you choose to pay a holding deposit, if the seller agrees to your offer to purchase their property it can take a few days for the sale contract to be drawn up so that your name appears on the paperwork as the buyer.
Once you and the buyer have each signed a copy of the contract, the sale becomes binding. This is when you pay the official ‘full deposit’ or ‘balance deposit’, and you’re on track to become the proud owner of your new home.
When do you pay a holding deposit?
If you decide to or agree to pay a holding deposit, it should normally be paid when your offer on a property is accepted. A holding deposit is not compulsory, so even if a seller or their real estate agent asks you to put a holding deposit in a contract, you do not have to do so.
How much is a deposit to hold a house?
How much you pay in a holding deposit varies according to negotiations between the seller and the buyer, except for in South Australia where it is capped at $100. If you do put down a holding deposit, be sure you get a written receipt from the real estate agent.
Is a holding deposit refundable?
Remember, a holding deposit is handed over before the official sale contract is signed, when you and the seller only have a verbal agreement – not a written, legally binding agreement.
The upside of this is that if you change your mind about buying the home, the holding deposit should be fully refundable.
The drawback is that without a signed contract, the seller is legally allowed to accept a higher offer from another buyer – something known as gazumping. If that happens, the holding deposit is fully refundable. So you should get the money back if someone else’s offer is accepted – though this can be slim consolation for missing out on a place you love.
Is a holding deposit part of the full price?
Yes, a holding deposit, if you decide to pay it, is part of the full sale price of a home and is considered part of the full or balance deposit (see above for more information). The role of the holding deposit is typically only used to show that an offer is serious, and that a buyer is keen to take the next step of signing the contract of sale. So a holding deposit is not an extra cost on top of the home’s selling price.
How do I pay a holding deposit?
Typically, the holding deposit is paid via electronic bank transfer to the seller’s real estate agent, who holds the amount in a trust account (on the seller’s behalf). Some agents may prefer other payment methods, such as cash, but it is important to keep evidence of the transaction and to receive a written receipt. This is in case a refund is required, or if you are successful in securing the property (in which case you’d forward that receipt to your solicitor). You will most likely need to have proof that you have paid the holding deposit.
What is a full deposit on a real estate contract?
A full deposit on a real estate contract is a sum of money the buyer promises to give to the seller, usually via their agent or solicitor, to legally activate the sales process. It is also called a balance deposit, contract deposit or purchase deposit, and most often applies to private treaty sales. Once the full deposit is paid and any “cooling-off period” has passed, the buyer’s and seller’s solicitors work through the contract terms, including liaising with the buyer’s lender if there’s a home loan involved, with the goal of achieving settlement. The deposit is a portion of the total contracted sale price of the home.
How much is the deposit on a home?
When talking about the deposit written on a contract, how much it is depends on the outcome of negotiations between the buyer and the seller. Common amounts used in Australia can range between 2.5% to 20% of the total sale price, according to a range of conveyancing sources reviewed by Canstar. However, this amount can vary widely due to the negotiation process and according to the conditions of individual contracts.
Both parties have to agree to the amount of deposit that is to be paid, and sign a contract with the deposit listed on it and the date it is to be paid, before it is considered to be legally binding.
It’s a good idea to keep in mind that a buyer could risk losing a portion of the deposit if they were to withdraw from a contract, or even all of it under certain circumstances. Offering a larger deposit could mean that this penalty ends up being larger as well. It could be a good idea to consult a conveyancing solicitor if you do need to withdraw from a contract after you’ve signed it.
For information about how much of a deposit is needed to get a home loan, this article may help: How much do you really need for a home loan deposit?
When do you pay a deposit on a home?
In a standard property sale, the home deposit has to be paid when you exchange the signed copies of the sale contract with the seller (or ‘vendor’), after your offer has been accepted.
If you buy at auction, you will typically sign the contract and pay a deposit on the spot. Once you have exchanged signed contracts and paid the deposit, the contract is legally binding but you do not technically own the property yet.
When you agree to buy a house, you generally sign one copy of the contract and the seller signs another copy – and then these are swapped so that you both sign both copies of the contract. The contracts can be swapped in person, via electronic delivery, or through the post, and it is usually handled by your solicitor, conveyancer, or real estate agent.
The contract will include the deposit amount (or amounts) that the buyer and seller have agreed on. Your home loan lender will also specify an amount that you must have in the bank for use as a home loan deposit, and this may be different to the amount your contract specifies you need to pay the seller. For example, your lender may require you to have 20% of the property value available as a deposit, even if the seller only asks for a deposit of 10% of the purchase price.
Explore further: How much do you really need for a home loan deposit?
If you pay a deposit on a house purchase, is it refundable?
Whether or not a house deposit is refundable depends on many factors, including the size of the deposit, the conditions of a contract, at what stage the buyer or seller wishes to cancel the contract, and other factors, such as the “cooling-off” laws that apply in your state or territory. It’s a good idea to consult a suitably qualified solicitor if you are considering entering into a property contract that you think may have a chance of crashing, or if you are considering withdrawing from a contract after it has been signed.
However, as a general rule, whether or not the buyer can get a refund on their full deposit depends on if the contract is conditional or unconditional:
- Unconditional contract: If the buyer pulls out of an unconditional contract after they pay the deposit, they are likely to forfeit a portion of the deposit during the cooling off period (apart from Northern Territory, where you are entitled to a full refund). Tasmania and Western Australia do not have cooling off periods. If a buyer wants to pull out of a contract after any cooling off period, it is possible that the entire deposit could be at risk. Usually, what would happen in this circumstance is written in the contract. Most contracts for houses sold at auction in Australia are unconditional.
- Conditional contract: The cooling off rules apply to these contracts as well (providing the state or territory has one). These types of contracts have ‘conditions’ written into them which list circumstances under which the buyer – or seller – can pull out of the contract. This may include, for example, if the buyer is not able to obtain enough finance, or the seller is not able to fix certain flaws discovered during the building, pest or pool inspection. Contracts for houses sold by private treaty will generally be conditional unless the buyer and seller agree otherwise.
Further detail: What if I change my mind about buying a house?
Additional reporting by Nicola Field and Jacqui Belesky.
Cover image source: fizkes/Shutterstock.com
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This article was reviewed by our Editor-in-Chief Nina Tovey before it was updated, as part of our fact-checking process.
A journalist for more than two decades, Amanda Horswill has reported on a galaxy of subjects, including property, lifestyle, hyper-local news, data journalism, the Arts and careers.
She’s served as the Editor of Brisbane News, Deputy Features Editor for The Sunday Mail, Deputy Editor – Digital at Quest Community News, and a host of other senior positions at News Corp, prior to joining Australia’s biggest financial comparison website, Canstar.
Amanda is fascinated with the ever-changing world of finance. A passionate believer in the motto “knowledge is power”, she strives to translate the news into practical information that will help readers make informed decisions about their future. While at Canstar, her work has been regularly referenced by publishers such as the Sydney Morning Herald , The Age, The New Daily and Yahoo Finance.
Amanda holds a Bachelor of Arts (Journalism, Media Studies and Production, and Public Relations) and a Graduate Certificate in Editing and Publishing, from the University of Southern Queensland.
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