Your Property Deposit:  Why is it paid into a trust account and not kept in your offset account? Is there another option?

When you buy a property, one of the most significant steps is paying the deposit. 

It’s a substantial sum of money, and it’s natural to wonder why it can’t sit in your own account, especially if you have an offset account saving you interest. 

Understanding why the deposit is handled this way is key to appreciating the security of the property transaction process.

The Trust Account: A Neutral and Secure Holding Pen

The fundamental reason your deposit isn’t paid directly to the vendor, nor held in your offset account, is that the sale is not yet complete. 

The deposit acts as a form of security, demonstrating your serious commitment to the purchase. A property deposit is held in a trust account by a neutral third party, such as the Real Estate Agent, Licensed Conveyancer or Solicitor, for both the buyer and seller. 

The deposit provides protection for both parties as when it is held in trust, it is safe until settlement, unless an early release is lawfully triggered. 

For the buyer, this ensures the money is protected if the sale falls through. 

For the seller, it demonstrates the buyer’s commitment to the purchase.

This protects the money by ensuring it is secure and is released to the vendor predominantly upon settlement, unless a vendor applies for an early release of the deposit before settlement. This has to be done through a Section 27 Statement, as outlined in the Sale of Land Act 1962

By law, these trust accounts are heavily regulated and audited. They are designed to be completely separate from the firm’s own business accounts. 

Why Not My Offset Account? The 3 Practical and Legal Reasons

While it might seem financially efficient to keep those funds reducing your mortgage interest, it’s not permitted for several critical reasons:

1. It Defeats the Purpose of a Deposit: A deposit is meant to be a guaranteed sum that the vendor can rely on. 

If the funds remained in your account, you could potentially access or use them, making them unavailable on settlement day. 

This would undermine the entire security the deposit provides.

2. It Ensures Impartiality: The trust account is managed by an independent professional – your Skilled conveyancer – who is bound by law to follow the instructions in the contract. 

They do not release the funds to the vendor until the purchaser becomes the legal owner on the title. 

This protects you, the buyer, by ensuring the vendor doesn’t get your money until you get the property.

3. It Facilitates a Smooth Settlement: On settlement day, the funds need to be transferred instantly and electronically between the various parties (your bank, the vendor’s bank, etc.).

Having the deposit already in a regulated trust account allows for this seamless transfer. 

If it were in your personal account, delays in transferring such a large sum could cause a failed settlement, potentially putting you in breach of contract.

What is a Deposit Bond

A deposit bond is a financial guarantee that serves as a substitute for a cash deposit when purchasing property. It is a certificate issued by an insurance company or financial institution, promising the seller (vendor) that the buyer will pay the full deposit amount at the time of settlement. 

How It Works

• Guarantee, not a loan: The buyer pays a one-off fee for the bond (typically 1-2% of the deposit amount for short-term bonds) but does not borrow the deposit amount upfront.
• Deferred payment: No cash changes hands at the time of the contract exchange. The buyer pays the full purchase price, including the deposit, at the settlement date.
• Security for the vendor: The bond offers the seller security, guaranteeing that the deposit amount will be paid by the issuer if the buyer fails to complete the purchase as per the contract terms.
• Buyer’s obligation: If the buyer defaults, the bond issuer pays the vendor, and the buyer must then reimburse the issuer. 

Key Benefits

• Financial Flexibility: It allows buyers to keep their cash in interest-earning accounts or other investments until settlement.
• Bridging the Gap: It is a cheaper alternative to bridging finance for those waiting on funds from selling an existing property.
• Quick & Convenient: Obtaining a deposit bond is often faster than arranging a short-term loan, with approvals possible within hours.
• Versatility: They can be used for standard residential property sales, auctions (with prior vendor consent), and long-term “off-the-plan” purchases. 

Potential Drawbacks

• Vendor Acceptance: Not all vendors or real estate agents may accept a deposit bond, especially if they need early access to the deposit funds for their own purposes. Buyers should always confirm acceptance beforehand.
• Still Liable: The buyer remains responsible for the full deposit amount and can face legal/financial consequences if they default on the purchase contract.
• Cost: While cheaper than bridging finance, there is a non-refundable one-off fee for the bond itself. 

Deposit bonds are a widely accepted and viable alternative in the Australian property market for eligible buyers, including first home buyers and investors, who may not have immediate access to a cash deposit. 

Do you have more questions about the financial process of buying or selling? 

The team at Skilled Conveyancing is here to provide clarity and ensure your funds are managed with the utmost security and care. Contact Skilled Conveyancing today on 03 9729 3512 or email usfor expert guidance.