Mortgage Deposit and Exchange Deposit Explained

Jamuna Rajah

In this article, we explain the difference between a buyer’s overall mortgage deposit and the deposit required when contracts are exchanged.

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Mortgage Deposit

A ‘mortgage deposit’ is the amount a buyer contributes towards their home upfront and declared at the point of mortgage application. For example, a buyer may pay 5% of the value of the property upfront and borrow the remaining 95% through one lender.

Alternatively, they may obtain a mortgage with the support of a Help to Buy equity loan. Having a 5% deposit is occurring more frequently due to Help to Buy schemes that support first-time buyers, who can pay a deposit of a minimum of 5% of the purchase price of the property.

Exchange Deposit

The catch, however, with having a 5% mortgage deposit is that on a standard purchase, the minimum deposit a buyer needs to pay is 10%, which is the ‘exchange deposit’. This is paid by the buyer’s Conveyancer to the seller’s Conveyancer on exchange of contracts, which makes the transaction legally binding.

Up until this time either buyer or seller can pull out for any reason. Under the standard conditions of contract between buyer and seller, which is the same in all Conveyancing transactions, 10% of the purchase price is payable unless a lower deposit is agreed between the parties.

If, at the time of purchase, a buyer is also selling a property and linking the two transactions, when exchanging contracts, it is possible to use the deposit coming from the sale towards the deposit on the purchase. If the deposit from the sale is lower than the 10% deposit required on the purchase, a buyer will need to confirm with the seller from the outset that this is acceptable, usually through their Conveyancers.

Please note that if a purchase doesn’t complete because a buyer defaults, the deposit is forfeited.

If a buyer fails to complete and only paid a 5% deposit on exchange of contracts, then the buyer will still be liable to pay the balance of the 10% deposit to the seller under the standard terms and conditions of the contract. The seller will be entitled to go through the Court system to claim the balance of the monies to make the full 10% deposit plus any damages.

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