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Everything you need to know about your deposit when buying a home

Paying a deposit when you sign an offer to purchase a new home is considered a show of commitment. But how much is needed and what happens to these funds?

Home Loan Deposit Options

Article summary:

  • Unless stipulated in the offer to purchase, there is no legal stipulation that a deposit must be paid, however, it is seen as confirmation of the buyer’s commitment to the sale.
  • Traditionally, the deposit amounts to 10% of the property purchase price and is kept in an interest-bearing trust account.
  • If the sale should fall through due to breach of contract, the prospective buyer stands to lose his or her deposit. However, sales that fall through due to bond disapproval do not generally incur forfeiture of the deposit.

The act of “putting down” a deposit when you sign an offer to purchase on a new home is considered a show of commitment – an act of goodwill, if you like. But how much is needed and what actually happens to your deposit?

Rhys Dyer, CEO of ooba home loans, South Africa’s largest home loan comparison service, answers your questions…

Why do I need to pay a deposit?

While the inclusion of payment of a deposit is common practice in South Africa, it is actually not compulsory. In fact, the current negative real property price growth in the South African market, and the need to appeal to first time home buyers, have made banks more open to granting 100% home loans (where no deposit is required).

However, if the offer to purchase specifically stipulates that the buyer pay a deposit, failing to do so will then constitute a breach of contract and the seller has the right to cancel the deal.

In effect, a deposit is a sign of commitment on the part of the buyer and reassures the seller that the buyer is serious in his or her intention to purchase. On the other hand, a deposit also offers some protection to the prospective buyer as it discourages the seller from cancelling the contract.

How much of a deposit do I need to pay?

The deposit amount can range from a few thousand rand to 20% of the property purchase price, depending on the seller and estate agent. Currently, most agreements call for a deposit of around 10% of the purchase price, however, with the help of an estate agent, this can be negotiated with the seller.

How will my deposit be managed?

The buyer has the choice of paying the deposit to either the conveyancing attorney who has been appointed to handle the transfer of ownership, to the estate agency negotiating the deal, provided the latter is logistically able to take deposit payments, or to Buyer’s Trust. Buyers Trust, a subsidiary of the ooba group, offers a secure alternative for buyers’ deposits, with a competitive interest rate. It is never recommended that the deposit be paid directly to the seller.

The deposit should be safely held in an interest-bearing trust account where it will earn interest until the transfer of ownership goes through.

Will I have to pay for this service?

While the conveyancing attorney, estate agent or Buyers Trust will charge an admin fee, this will usually be deducted from the interest earned and not the capital investment.

What is Buyer’s Trust, and how can they help me manage my deposit?

Buyers Trust offers a safe and convenient way to manage your deposit.

How it works:

  • Buyers Trust creates a bank account with one of the major banks in your name, transfers your deposit into that account, and administers the account under a specific investment mandate provided by you.
  • They issue a guarantee to the transferring attorney that you have fulfilled your contractual obligations to the property seller.
  • You are able to easily keep track of all interest you earn on the account.
  • The Buyers Trust fee covers everything, including administration fees charged by the bank; so there will be no additional charges.
  • Once the property has been transferred, and the deposit paid to the seller’s attorneys, the account will be closed, and the net interest earnings delivered to you.

Buyers Trust is regulated by the Financial Sector Conduct Authority, and takes extensive measures to combat fraud and ensure the security of your deposit.

What if the sale falls through?

If you, as the buyer, are in breach of the contract, and the breach cannot be rectified within a stipulated time frame, you will forfeit your deposit and the seller has the right to use this to cover any damages (such as legal costs) that have resulted from the deal having fallen through.

If your offer to purchase is contingent on bond approval and if, for whatever reason, your financing is not approved, your deposit will be refunded to you. However, if you deliberately withdraw your bond application, you could find yourself in breach of contract and you may lose your deposit.

Ultimately, paying a deposit helps to ensure that both parties honour the agreement of the offer to purchase. A deposit is an excellent way to show goodwill and secure the sales agreement on the home of your dreams. It also improves your chances of securing a favourable interest rate on your home loan from the bank.

If you’re considering taking the next step and investing in a property, bear in mind that ooba home loans, South Africa’s largest home loan comparison service, offers a range of tools that can make the home-buying process a lot easier. Start with their home loan calculators, then use the ooba Bond Indicator, a free, online prequalification tool, to determine what you can afford. Finally, when you’re ready, you can apply for a home loan.

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