What is a deposit?

A deposit does several jobs at once. It signals good faith and discourages casual offers. On completion it is treated as a credit against the total price, much like a down payment. If the purchaser defaults, the vendor commonly has the option to keep it as liquidated security or pursue further remedies. And it balances risk between buyer and seller during the gap between exchange and settlement.

The amount depends on market conditions (competitive markets often see higher deposits), the property type, the bargaining power of each side, and the buyer's finance requirements and lender policies. It is generally payable on exchange of contracts or on the date the deposit clause specifies, so check that clause for the due date, the acceptable payment methods and whether the deposit is refundable in stated circumstances.

Deposits are paid by electronic funds transfer (the most common method, for speed and traceability), by cheque (bank-guaranteed if required), by bank cheque or cleared funds where the vendor insists, or by deposit bond in place of cash. The funds are commonly held by a neutral party: the real estate agent's regulated trust account, the vendor's solicitor or conveyancer acting as stakeholder, or an independent stakeholder agreed by both sides.

Trust account rules require strict handling of client funds. The receipt records who holds the deposit, the account reference and any conditions attached, and in a dispute those records are the primary evidence. Parties can agree to release part or all of the deposit before settlement, but only on written authority signed by both vendor and purchaser naming the stakeholder, the amount, the date and the purpose.

At settlement the deposit is applied as part-payment, the purchaser pays the balance and the stakeholder issues a receipt. If the buyer defaults, the vendor may forfeit the deposit under a forfeiture clause, terminate and claim any shortfall after reselling, or in limited cases seek specific performance. If the vendor defaults, the purchaser is ordinarily entitled to the deposit back and may claim damages or specific performance. Cooling-off periods, where state rules provide them, allow withdrawal within a limited time, usually with a penalty, and a finance condition decides whether failing to get finance is a valid termination or a default.

A deposit bond lets a purchaser keep cash liquid or meet off-the-plan requirements, but it has a fixed expiry: if settlement is delayed beyond it, the purchaser must provide cash instead. Issuers may require indemnities or security, and vendors may refuse bonds, so check the issuer and wording carefully.

In asset finance the deposit is the cash a borrower contributes towards the purchase, which reduces the amount financed. On a car loan or an equipment loan a larger deposit lowers the loan-to-value ratio, which lenders read as lower risk, and it cuts the total interest paid over the term.

A trade-in can stand in for part of that contribution. Unlike a sale-contract deposit, the money is not held by a stakeholder: it goes to the supplier at settlement alongside the lender's funds. A security deposit is the same contribution under another name.