Brown and Brown Conveyancing eNews ~ Deposits "Placing a Deposit on a Property ~ What you need to know"

Garth Brown, B. Bus, Fellow of AICNSW, JP

Deposits - what you need to know

Placing a Deposit on a property these days is getting harder and harder to tender as property prices keep rising and saving for a deposit is taking longer.

A general rule of thumb is a Purchaser will need a deposit of 5% to 10% of the property purchase price, however, it is up to the home lender you choose to approve the amount of deposit you will need and the type of home loan you are seeking. The deposit is paid at the time of exchange of contracts.

To ensure your ability to repay a home loan your lender will want to have evidence you have a very solid employment history, and an exceptional credit history along with proof of a genuine savings plan.

If you are able to access a mortgage with a 5% deposit your home lender will work out the LOAN TO VALUATION RATIO (LVR) to determine whether your home loan needs to be covered by Lenders Mortgage Insurance (LMI) or a Low Deposit Premium.

It is wise to seek the best home lending advice available before you decide on a home loan and if you want to work with a 5% deposit then ensure the lender is willing to do that and you understand the extra expenses that are associated with a higher loan as a result of a lower deposit.

Use a Buyer’s calculation table and add all the outgoings to your original figures to ascertain if you will be able to afford higher repayments based on a higher loan as this will save you from any surprises later when repayments start.

Check the Vendor is willing to accept a 5% deposit so you are not disappointed if it is refused. But generally Vendors will accept a 5% deposit to ensure a sale.

An important point to keep in mind with paying a 5% deposit is to make sure your Conveyancer adjusts the front page of the Contract to – the Deposit is 5% - if you leave the Deposit marked on front page of Contract as the Deposit is 10% percent – then if the Conveyance does not settle and you default the Vendor will be entitled to recover the remaining 5% when in fact you only paid 5%. These terms are generally covered by a special condition in the Contract ask your Conveyancer if this has been written in.

In law if there is a dispute the question arises – what was the intention of the Purchaser? If the intentions are not listed in the contact then they cannot be proved. Before you sign and exchange contracts ensure the Contract outlines all your intentions – this equally applies to the Vendor. As with every contract remember “Caveat Emptor”.

According to the AIC they receive very few complaints about AIC Members, this is very positive as it reveals their members are more likely to be diligent and conscientious in handling the conveyance resulting in a problem free (pre and post) settlement.

Deposit Bonds are an interesting concept - particularly if you have money tied up in a term deposit, a family home or other investments and need more time to convert your assets to cash. A Deposit Bond is an instrument that, by agreement with the vendor, can replace the need for a cash deposit, it enables the purchaser to defer payment of their deposit until settlement. A Deposit Bond is NOT a policy of insurance. It is a form of surety or guarantee.

Over the past 10-15 years Deposit Bonds have become popular and they are relatively easy to secure if you qualify. They are available as short term deposit bonds for settlement periods up to 6 months and long term deposit bonds for settlement periods between 6 and 48 months. Long term deposit bonds are generally used for the purchase of off the plan properties.

If there is a default in completing the purchase of the property the Vendor can take the original bond to the Insurer and claim the full amount of the Deposit Bond. In turn the Insurer will seek reimbursement from the purchaser plus costs and expenses.

The vendor can apply for a Deposit Bond to use to purchase another home with the same settlement date as their sale (provided the Vendor of the home they are buying has agreed to accept a Deposit Bond).

A Bank Guarantee is underwritten by a Bank or reputable lending institution ensuring that the liabilities of a debtor will be met, i.e. if the debtor fails to settle the debt, the bank/lender will cover it. They are used in Property development and alow cash funds to be used for other purposes. They are an ideal protection for the vendor as funds are guaranteed from the issuing bank.

Brown and Brown Comments

The Barristers’ I used to work for many years ago always elected for an unconditional Bank Guarantee for a Purchaser buying off the Plan rather than a Deposit Bond, because the DB was always reinsured with another insurer and he felt there too many hoops to jump through to recover a Deposit, by using a Bank Guarantee there was no questions asked, you present you are paid – particularly when there were so many buyers from overseas looking to buy into a very modern complex in the Lower North Shore of Sydney.

I always used to be amazed that a Buyer would fly out from Singapore or Hong Kong, arrive at Sydney airport in the morning, buy a $1+ million dollar property by lunchtime and fly home that evening – these buyers knew the value of property in Sydney was better than in Singapore or Hong Kong and they were assured of a solid investment – and this has proved true over the years as Sydney property prices have continued to rise. This was another world for me coming from Central West NSW and a very good training ground for my future Conveyancing Firm.


Our next eNEWS June 2015 - “Drainage Diagrams in Contracts”

Garth Brown, B. Bus, Fellow of AICNSW, JP

Brown and Brown Conveyancing
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