Buying a home: Are deposits still needed?
When it comes to home buying, nothing attracts the attention of the seller quite like a deposit. Putting down a deposit when signing an offer to purchase (OTP) is seen as a show of commitment.
A deposit – usually 10% of the cost of the property – indicates to both the banks and the seller that you are a serious buyer.
However, while deposits were once part and parcel of the home buying process, the latest statistics released by Ooba Group indicate that zero-deposit home loan approvals are on the rise.
Rhys Dyer, CEO of Ooba Group, said: “During the first quarter of 2021, we successfully obtained home loan finance for 80.7% of our applicants – 61% of whom required a zero-deposit loan. Quarter 1’s approval rate across first-time buyers who required a zero-deposit loan was 79.3%.”
This raises an important question – is a deposit still needed to purchase a home?
“It’s not that simple,” said Dyer. “While this data underpins the banks’ favourable lending criteria in recent years, a deposit remains the best way to guarantee an approved home loan application.”
“With a deposit, you’re proving to the banks that you can finance at least a portion of your home purchase, which makes your loan a lower risk and indicates your ability to make the monthly repayments.” he said.
In addition to increasing the chances of your home loan being approved, Dyer said that there are still many added reasons why a deposit will benefit you – as the buyer – in both the short and long-term.
Short-term savings can lead to long-term disadvantages
While it might be tempting to think that not paying a deposit upfront reduces the cost of purchasing a house, this short-term saving will cost you more in the long run.
Simply put, a deposit reduces the amount that you need to repay to the banks. “Smaller monthly repayments reduce the amount of interest that you need to pay on your home loan over the borrowing period – and this stands to benefit you in the long-term,” said Dyer.
“The less you borrow, the less you have to pay off – and that’s a huge advantage when you do the math. A deposit also gives you some leverage when negotiating a better interest rate as you have proven yourself to be a lower risk.”
Dyer said that an additional benefit of putting down a deposit is that it will help you to stand out from the crowd when vying for your dream home.
“We are still very much in a buyers’ market and the competition is fierce – but if you find yourself in a multi-offer situation on a property and you put down a deposit, the seller is more likely to accept your offer over other prospective buyers,” he said.
Read the fine print
Dyer warns prospective buyers that they may not have a choice about whether they should pay a deposit. “An OTP on certain properties might specifically include a stipulation that the buyer pays a deposit and that failing to do this constitutes a breach of contract. This gives the seller the right to cancel the deal.”
Securing your deposit
After you’ve weighed up your options and decided to pay a deposit comes the next hurdle – how best to secure it?
With majority of real estate transactions occurring online, opportunities for cybercrime are rife, leaving buyers vulnerable to losing their deposit.
These types of crimes commonly and easily occur when e-mail records between the agent, buyer, and the respective lawyers to whom the deposit is paid are intercepted by a malicious third-party. This is commonly known as phishing.
“Unfortunately, these crimes can slip under the radar because the buyer traditionally has little to no line of sight on the deposit after the money is paid,” said Dyer.
The general process is as follows:
- The deposit is declared in the offer to purchase and must be paid upon acceptance.
- The deposit is placed in a trust and hopefully kept safe until the property transfer and registration process is complete.
Dyer said that most buyers mistakenly believe that they only have two options of who can manage the trust: the transferring attorney or the estate agent.
“Ooba Group wanted to give buyers a third option to securely manage their deposit – one that would ensure full transparency over the deposit process until the transaction was completed.”
“This is where Buyers Trust (a subsidiary of Ooba Group) comes in. The system has been designed with countless security measures to protect it against the cybercrime threats that attorneys and estate agencies fall victim to. Buyers Trust also gives you full visibility of your deposit at all times, in an account that is in your own name, so you’ll have 100% peace of mind of the safety of your deposit.”
Getting the most out of your deposit
For many buyers, the main motivator for putting down a deposit when purchasing a house is the desire to save as much money as possible in the long-term.
Dyer said that Buyers Trust is structured with these savvy buyers in mind by delivering maximum return on investment.
“Choosing Buyers Trust means that buyers have a higher chance of netting better interest returns on their deposit than they would have if they’d entrusted the account to a transfer attorney, as well as benefitting from all-inclusive fees with no unexpected costs,” he said.
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