WHAT DOES ‘DEPOSIT’ MEAN IN CONVEYANCING?
When buying a property and hearing the word ‘deposit’ you would immediately link it to the deposit your mortgage broker told you about (or to the one that the bank is asking for). However, ‘deposit’ does not always mean the sum of money you are providing on exchange of contracts.
The meaning of ‘deposit’ in conveyancing.
In conveyancing the word ‘deposit’ has two meanings.
The first one is obvious – you will tell the mortgage broker or the lender what amount of money you have available and it will be used to calculate the Loan to Value ratio (LTV). For example, usually the lender will ask for at least 10% deposit to be able to provide you with a mortgage. During the COVID-19 pandemic, lenders started to ask for bigger deposits and some lenders now ask you to provide 20% of the purchase price. There is also a possibility of providing 5% deposit when you are using a scheme such as Help to Buy.
On the other hand you might have inherited a sum of money and you want to use it towards the deposit. That would mean that you will have, for example, 60% deposit available and the lender will only provide you with the mortgage of 40% of the value of the property.
However, there is a second meaning of the word ‘deposit’ in conveyancing and it is also very important. When you receive a contract to sign you will see that the solicitor must write two amounts in the spaces provided– one for the purchase price and one for the deposit. In this contractual meaning, the deposit means the amount of money you might lose when the transaction will not complete due to the default of the buyer. This should not amount to more than 10% of the value of the property, however sellers do not usually agree for it to be less than 10%. In the case of Rock v Ready [2016] EWHC 3043 (Ch) the buyer lost £43,000 because they failed to complete.
Therefore it is important to distinguish between the deposit in the context of the lender and the contractual deposit. Even though you might want to put 60% deposit towards the purchase, the contractual deposit should not be more than 10% of the purchase price to secure the rest of your money.
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