Your home loan deposit: Everything you need to know

Article summary

• The deposit usually amounts to 10% of the property purchase price, and must be paid if the offer to purchase requires it.
• The deposit is not paid directly to the property seller, but rather to a transferring attorney or estate agent, who manages it on your behalf until the property registration process is complete.
• You can also pay the deposit to Buyers Trust, who will keep it in an interest-bearing bank account with your name on it.
• 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 who do you pay that deposit to and how is it managed?

ooba home loans, South Africa’s largest home loan comparison service, is here to explain your home loan deposit options, and answer whatever questions you may have…

Your home loan deposit: What you need to know

How much of a deposit do I need to pay? 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.

Do I have a choice whether to pay a deposit or not? 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 pays a deposit, failing to do so will then constitute a breach of contract and the seller has the right to cancel the deal.

Who do you pay the deposit to, and how is it managed?

Of course, you want to know what actually happens to your deposit. First thing to know is that you don’t pay the deposit directly to the home seller. It’s put in an account (or trust) and kept safe until the property transfer and registration process is complete.

Furthermore, if you elect to have the deposit kept in an interest-bearing account, any interest that is generated by the deposit will be paid over to you upon registration of the property.

But who controls the trust into which the deposit is placed? In the past, you have had two choices:
• The transferring attorney, or
• The estate agent

The transferring attorney is usually appointed by the seller but you can negotiate to appoint your own. Either way, you’ll want to give the attorney written instructions to deposit the funds into a separate interest-bearing account rather than a trust, so you can benefit from the interest.

The estate agent will generally transfer your deposit to the attorney, so it ends up in the same place anyway, but you may have a better relationship with the estate agent.

The transferring attorney and estate agent are both covered by a fidelity fund, which guarantees that you will receive compensation in full if either the estate agent or attorney appear to have “misplaced” your deposit.

The third option: Buyer’s Trust

Buyers Trust, a subsidiary of the ooba home loans group, offers a strong alternative to the transferring attorney and estate agency as a place to invest your deposit. When signing the Offer to Purchase, select Buyer’s Trust as the financial service provider with whom you wish to invest your deposit. You’ll gain the advantage of an account in your own name with one of the major banks, a great rate of return on interest, transparency and high-level security.

What is Buyers Trust, and how can they help me manage my deposit?

Buyers Trust is like a bank guarantee, but without the hefty price tag. Instead of entrusting an estate agent or attorney to keep your deposit safe, you’ve got it secured with one of South Africa’s major banks.

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.
• You can view the account at any time and receive statements, providing 100% transparency on your investment.
• Before opening an account, the app enables you to be FICA’ed electronically, making the process seamless.
• They issue a guarantee to the transferring attorney that you have fulfilled your contractual obligations to the property seller.
• You will be sent regular statements, and you’ll be 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.
• Buyers Trust will transfer the funds to the transferring attorney when requested, so you can take ownership of the property.
• 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 calculated and 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. You’ll be able to rely on the security measures of a major bank to keep your deposit safe, instead of exposing it to the risk of dangerous scams and phishing emails that target law firms and real estate deposits in particular.

Other questions you may have about your deposit

Will I have to pay for the service of managing my deposit?
While the transferring 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 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.

Why all this fuss over a 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 bond calculator; then use their free, online prequalification tool, the ooba Bond Indicator, to determine what you can afford. Finally, when you’re ready, you can apply for a home loan.