How Do I Protect My Deposit When Buying a House?
For most people, the deposit they pay when buying a house is a considerable amount of money. Unlike the completion funds which, when paid, enables you to obtain the legal Title to the property, the deposit appears no more than a holding fee. You don’t own anything. You simply have a contract to buy the property.
It’s worth noting that thousands of property transactions happen every day across the UK and very rarely will a situation arise where the security of the deposit is in question. However, if you have any questions get in touch with our Conveyancing Solicitors for free initial advice.
So What Happens to the Deposit?
You’ll be asked by your Solicitor to pay your deposit (usually 10% of the purchase price) close to the time when contracts will be exchanged for the purchase of the property.
Exchange of contracts, as you probably know, is that point in the transaction where both parties bind themselves to the sale and purchase of the property. When you pay your deposit to your Solicitor, the funds are received into the Solicitor’s Client Account. This is an account which is separate from the Solicitor’s day to day account and the payment is ring-fenced so it can only be used for the purpose for which it was paid.
In a normal purchase transaction, where the seller isn’t buying on, the deposit is paid to the seller’s Solicitors on the basis that those Solicitors will hold the deposit as stakeholder. This means that the deposit can’t be paid to the seller or a third party until completion of the transaction, whereby you receive legal Title to the property in exchange for the completion monies.
The effect of this is that if the matter cannot be completed for any reason which isn’t your fault, then the deposit can safely be returned to you. If, however, the inability to complete the matter is due to a fault on your part, then the deposit can be released to the Seller.
If the house you’re buying is part of a chain transaction, whereby the seller is buying on, then the whole or part of your deposit can be used as a deposit on the property which the seller is buying. The same principle then applies on each transaction in the chain of transactions, but the end transaction will usually be holding the funds as stakeholder so the element of protection is still there.
In some property transactions, the deposit isn’t held as a stakeholder but is received as agent for the seller. This is most common when buying from a builder and means that the deposit can be released to the seller. Most home builders will, however, be members of a guarantee company such as the National House Builders Council, where protection is afforded to the buyer in circumstances where the deposit can’t be returned. You’d no doubt be advised by your Solicitor if payment was being made without such safeguards.
Simpson Millar Solicitors are a national law firm with over 500 staff and offices in Bristol, Cardiff, Lancaster, Leeds, Liverpool, London and Manchester.