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Loan for Deposit

Discussion in 'Property Finance' started by pommy, 15th Jan, 2016.

  1. pommy

    pommy Well-Known Member

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    Hi All

    My bank said it could take 3 weeks to arrange an IO loan arranged with funds ready, secured on the PPOR. This is a loan that I intend to use as a deposit for the IP.

    Would the best way be to simply apply for it now then I'll be ready to make offers when it is set up.

    I can't see that it is possible the other way round i.e. make an offer then need 3 weeks to come up with a deposit? My lender also mentioned a company called 'Deposit Power' that can guarantee the deposit but then that is another cost that is potentially unnecessary.

    How do you all normally do it?
     
  2. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Yes, it takes time to get a loan for a deposit ready. 3 weeks is quite reasonable.

    Do you actually need the money immediately? It's quite common for people to put down a $1000 holding deposit for a few weeks and the balance when the offer becomes unconditional. All it takes is a little negotiation with the agent.
     
    Last edited: 15th Jan, 2016
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  3. JacM

    JacM VIC Buyer's Agent Business Member

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    Hi @pommy

    As @Peter_Tersteeg has mentioned, people often put down a small holding deposit with balance of deposit when the offer becomes unconditional.

    Another thing to point out is that there are two concepts of "deposit" :

    The "deposit" as per what you negotiate for the contract of sale. This might be as much as 10% of purchase price, or as low as $1000. It depends on what you negotiate. If you want to put a small amount such as $1000 down when signing the contract and the rest after finance, building and pest etc is ticked off, the contract should explicitly state these two payments and when they are due. For instance, total contract of sale deposit might be $5000. The contract might state that $1000 is payable within 7 business days of the seller signing the contract, and the remaining $4000 within 7 days of finance being approved.

    The other side to the deposit story is "how much you need to put in to cover the difference between what the bank is loaning, and funds required to purchase the property". Then there is of course stamp duty, legal fees etc. So let's say you have gone to contract on a property for $400,000 with a contract deposit of $5,000. Let's also say your investment property lender is going to provide an 80% lend. That means the lender will only provide $320,000. The difference is $80,000. You already paid $5,000 of this as per the contract deposit, so you still have to find another $75,000. And deposit, legal fees etc. The $75,000 plus stamp duty and legal fees and such wouldn't be needed till around a week before settlement. That's when your conveyancer would want to see the money coming into their trust account to be sure funds were ready and sufficient for settlement. Or if you are funding settlement without using a conveyancer's trust account, you yourself would want to be sure you had enough money in your hands to settle on time.

    If you were on a 60 day contract your equity release, this should provide enough time to get the equity release money, however you would want to be extremely certain the equity release had already been approved. You would also be surprised how the process of the bank getting the loan docs for the equity release to you can be. Or how long they take to check the signed docs when you return them. Allow time for this. Don't back yourself into a corner.

    It is much tidier and low stress to go through the equity release process first, wait till you can physically see the money in a bank account, and then go shopping for the IP.

    Hope all this makes sense.
     
  4. Magnet

    Magnet Well-Known Member

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    Yes, that's what we do. We have a LOC loan set up for the deposit, it takes at least 3 weeks to have it all approved. Gives you a bit of time to continue to watch the area you have researched and be ready to pounce when the deposit funds hit your account if you see something that fits your criteria.
     
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  5. jpcashflow

    jpcashflow Well-Known Member Business Member

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    Hello,
    Good luck on the new purchase :).
    When putting a offer for a property I usually advise my clients to have in writing that the deposit will be paid once the finance is approved with a $1000 holding deposit.

    You can use some like deposit power "etc" where for a fee they can provide a guarantee in regards to the deposit.

    I helped a client do one the other day only took 24 hours to get approved. Have a look at their site and contact them :)
     
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  6. Magnet

    Magnet Well-Known Member

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    Sorry, forgot to mention we only offer the $1000 deposit and haven't had any probs.
     
  7. pommy

    pommy Well-Known Member

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    Interesting. Would this be a weaker offer though than someone who can complete more quickly. I am looking to buy in Brisbane. If I adopt that strategy would I get outdone by others or is that quite standard?
     
  8. pommy

    pommy Well-Known Member

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    Thanks so much for all of your replies. I think I will apply for the loan soon anyway but bear in mind that as Peter and others have suggested that a fairly small deposit can secure the property. I will definitely work hard to avoid the 10% deposit scenario.
     
  9. Drgonzo

    Drgonzo Well-Known Member

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    There is no reason legally why you couldn't provide a paper clip as a deposit. The whole thing is a nonsense.

    I recently bought a block of land. The contract contemplated that a deposit would be paid but I never paid it and it settles next week.
     
  10. Blacky

    Blacky Well-Known Member

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    In which case you dont have a contract.
    Therefore come next week, the vendor could issue a letter, stating that the contract is not valid, and not proceed to settlement. You dont have a leg to stand on.
    Why would the vendor do this? Well, maybe they recieve a higher offer on the property. They cancel your 'contract' and accept the higher bid.

    Blacky
     
  11. Drgonzo

    Drgonzo Well-Known Member

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    No I still have a contract, I am just technically in breach. The contract says they must first issue a default notice and if I don't remedy the default by paying the deposit then they have the right to terminate.
     
  12. Marty McDonald

    Marty McDonald Mortgage broker Business Member

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    All the respondents are ignoring the poster is in Sydney / NSW where the contract system is a bit different the rest of the country. There are no finances clauses or building and pest clauses and the deposit is pretty much set at 10%. There are two usual ways a deal gets inked.

    1) If there is a cooling off period you put down a 0.25% at risk deposit at signing of the contract then you are required to come up with the balance of the 10% at the end of the cooling off period which is a standard 5 working days.

    2) Or if you waive your cooling off period (using a 66W form) which is extremely common you pay the full 10% deposit at the same time as signing of the contract.

    Exceptions apply like using a 5% deposit or having a longer period to pay the deposit after the cooling off expires but the two most common ways are as outlined above.
     
  13. Drgonzo

    Drgonzo Well-Known Member

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    So how does that work for someone with five percent? I think you will find that the ten percent deposit is negotiable.
     
  14. Marty McDonald

    Marty McDonald Mortgage broker Business Member

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    yes negotiable but is not like you can stump up $1000 or $5000 etc. It is my experience that the only acceptable deposits are 10% or 5% in cash or a depoist bond for the 10%
     
  15. Drgonzo

    Drgonzo Well-Known Member

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    Why couldn't you?
     
  16. dabbler

    dabbler Well-Known Member

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    It will depend on market and the vendor, you can negotiate any sort of deposit often, even in a hot market, only when a vendor needs the funds released will this be a def no.

    It is easier to have it ready, so you can negotiate properly with any serious seller, i.e if you only have a grand and the vendor insists on a 10% deposit, you are stuck, but sometimes when your looking - but not yet ready, some agents will dig and you can explain situation, then they can run with it and see if a deal can be struck, a lot are too lazy & if there are others with the money, well.......