Confused about the different references to DEPOSITS in conveyancing transactions?

There are two types of deposits in a conveyancing transaction which people refer to.

The first reference to a deposit is the ‘contract deposit’ a Buyer is required to pay to secure the property in terms of the Contract for the purchase of the property. This deposit is generally paid to the real estate agent involved in the transaction to be held on trust pending settlement. This type of deposit can be (in Queensland) anything between $1,000.00 to 10% of the purchase price.

The second reference to a deposit is usually in reference to the financier’s / mortgagee’s / bank’s ( hereinafter referred to as “financier”) requirement from the Borrower (the Buyer) to contribute to the purchase price, in order to obtain satisfactory finance (borrowed money) from the financier.

Financiers talk about LVR’s (Loan to Value Ratio’s). This means a financier which applies an 80% LVR will only advance a Buyer a loan to the maximum of 80% of the property’s actual market related value.

The Buyer must then pay the shortfall, i.e. the 20% to make up the full purchase price at settlement. This 20% is also referred to by the financier as a deposit (their reference of a deposit), which is not to be confused with the ‘contract deposit’ paid to the real estate agent mentioned earlier.

The deposit paid to the real estate agent is part of the purchase price and part of the 20% deposit the financier requires from the Borrower (Buyer). The contract deposit will effectively ‘merge’ with the 20% deposit required by the financier. The financier’s deposit is only payable at settlement.

In other words, the Buyer will not be required to pay the 20% deposit in addition to the ‘contract deposit’ paid to the real estate agent. Those two amounts will be added together to form the deposit the financier requires.