You have finally found your dream home and now you can sign the contract and pay the 10% deposit. But the deposit is either incorporated within your loan amount or you are using funds from the sale of your current property or monies are held within a term deposit or other investment.
So what are the options?
Option 1 – Persuade the seller to accept a smaller deposit.
This option is risky for the seller and not the purchaser, as the NSW Court of Appeal case, Iannello v Sharpe decided in March 2007. Until then a seller who accepted less than normal deposit (i.e 10 % of the sale price) would nevertheless be able to recover the full ten per cent deposit from the buyer in the event of a default.
But the Court decided otherwise, stating that the sellers, who had accepted a 5% deposit, were entitled to keep it, but could not go on to claim the remainder of the 10% from the buyer even though the contract said so.
Option 2 – Obtain a Deposit Guarantee Bond.
A bond acts as a substitute for a cash deposit. The bond is a binding promise by an insurance company or bank to the seller to pay the deposit money should the buyer default. Sellers are guaranteed their money (simply on demand) and the buyers would only have to pay a small fee for the bond (typically 1.2% of the deposit).
The catch is that no “standard form” bonds exists. Each has to be checked for hidden traps such as time limits which can differ dramatically between the different issuers of a bond. If the buyer defaults and the time limit on the bond has expired, the seller is no longer protected by the guarantee and will be denied the money if they claim for it.
Their only redress will be to sue the buyer (which, of course, is where the real problem for the seller begins). And, yes, it can easily happen that you run out of time if the sale drags on.
Worse still, if you are the buyer of the bond and you default under the purchase contract, then the insurer will come looking for its money from you.
But, in short, deposit guarantee bonds can prove a quick, easy and cost-effective solution, provided that both the buyer and seller are familiar with the “fine print” and their solicitor or conveyancer ensures that the time limits are sufficient for the transaction, prior to exchanging contracts.
Option 3 – If you are selling your home to buy another, ask your buyer to release the deposit so you can apply it towards your purchase.
But this is risky for the buyer. Releasing a deposit is no different to making an interest-free loan to a total stranger. The dangers are obvious. What if the seller is mortgaged to the hilt? Who’ll end up with the deposit money then?
Option 4 – Borrow the money or get someone else to pay it for you.
Lets face it, unless you have a very generous relation, or a very friendly bank manager, this is unlikely and negotiating even a short-term loan can be costly (and loans have to be serviced and repaid).