Deposit on exchange of contracts

[PistonRings]

This is our first time selling and buying and I’m looking for a sense check (maybe ELI5)

Using easy numbers as example just to keep the situation simple:

We are selling for 150k, buying for 300k.
We have 75k equity, this is being used to place a 60k deposit, pay stamp duty and the remaining 10k back to us.
We’ve received contracts and it says, on both “The terms of the Contract state that the Buyer is liable to pay a 10% deposit”

I asked solicitor does this mean she’s expecting us to transfer 30k cash before exchange however her response before she seemingly finished for the day was “ In regards to the contract deposit this is always 10% and is not the same as your mortgage deposit”.

Have I misunderstood what she’s asking ? Is this standard practice? It’s struggling to understand how this would even be correct, our mortgage etc is all on the value of 60k down etc.

[bltamil1]

I think you are misunderstanding. The 10% deposit they are talking about is standard practice and is part of the agreed sale price, not in addition to it.

I think you mean that you are putting in £60k and the remaining £240k from a mortgage?

In simple terms, the deposit just means that you will send £30k to the solicitors on exchange, and then the other £30k on completion where your solicitor will also draw down the £240k mortgage.

[blueg33]

She is correct

The contract states your deposit is 10%, this is usually held by solicitors in case of default on completion.

The mortgage deposit reflects the loan to value.

[PistonRings]

Thanks for the replies however my query is more around cash flow - I won’t have the 30k (or ultimately 60k) until I have completed our sale, therefore can’t place 30k deposit at exchange of contracts.

[blueg33]

PistonRings said:

Thanks for the replies however my query is more around cash flow - I won t have the 30k (or ultimately 60k) until I have completed our sale, therefore can t place 30k deposit at exchange of contracts.

Normally the deposit passes up the chain, and where there is a shortfall it’s usually agreed that a smaller deposit is held, but that increases to 10% in the event of a default.

[Nothingtoseehere]

blueg33 said:

PistonRings said:

Thanks for the replies however my query is more around cash flow - I won t have the 30k (or ultimately 60k) until I have completed our sale, therefore can t place 30k deposit at exchange of contracts.

Normally the deposit passes up the chain, and where there is a shortfall it s usually agreed that a smaller deposit is held, but that increases to 10% in the event of a default.

What he said. No need to worry.

[Opapayer]

PistonRings said:

This is our first time selling and buying and I m looking for a sense check (maybe ELI5)

Using easy numbers as example just to keep the situation simple:

We are selling for 150k, buying for 300k.
We have 75k equity, this is being used to place a 60k deposit, pay stamp duty and the remaining 10k back to us.
We ve received contracts and it says, on both The terms of the Contract state that the Buyer is liable to pay a 10% deposit

I asked solicitor does this mean she s expecting us to transfer 30k cash before exchange however her response before she seemingly finished for the day was In regards to the contract deposit this is always 10% and is not the same as your mortgage deposit .

Have I misunderstood what she s asking ? Is this standard practice? It s struggling to understand how this would even be correct, our mortgage etc is all on the value of 60k down etc.

The previous two answers have confused me and I’ve bought and sold dozens of houses over the years.

You don’t send the solicitor any money at all in the example you’ve given. Put simply the deposit on exchange is a paper exercise. Your solicitors and the solicitors of those you’re buying from know that and will agree the deposit payable comes from equity in the sale of your house which only exists as cash in completion of sale of your existing property.

The 10% figure is what you are legally liable for should you withdraw from the purchase after exchange of contracts (which you won’t). Your solicitors will ensure exchange on your purchase only happens after exchange has happened on the sale of your existing property. It might be a matter of seconds between the two exchanges of contracts.

[PistonRings]

blueg33 said:

Normally the deposit passes up the chain, and where there is a shortfall it s usually agreed that a smaller deposit is held, but that increases to 10% in the event of a default.

Thanks, this is my understanding and I wanted someone to confirm it - I’m hoping to have a chat with her tomorrow rather than emails as she has a habit of not actually answering what I’m asking.

[PistonRings]

Opapayer said:

The previous two answers have confused me and I ve bought and sold dozens of houses over the years.

You don t send the solicitor any money at all in the example you ve given. Put simply the deposit on exchange is a paper exercise. Your solicitors and the solicitors of those you re buying from know that and will agree the deposit payable comes from equity in the sale of your house which only exists as cash in completion of sale of your existing property.

The 10% figure is what you are legally liable for should you withdraw from the purchase after exchange of contracts (which you won t). Your solicitors will ensure exchange on your purchase only happens after exchange has happened on the sale of your existing property. It might be a matter of seconds between the two exchanges of contracts.

Thanks, it’s incredibly frustrating as there is so much conflicting info out. Appreciate your response

[TA14]

PistonRings said:

Opapayer said:

The previous two answers have confused me and I ve bought and sold dozens of houses over the years.

You don t send the solicitor any money at all in the example you ve given. Put simply the deposit on exchange is a paper exercise. Your solicitors and the solicitors of those you re buying from know that and will agree the deposit payable comes from equity in the sale of your house which only exists as cash in completion of sale of your existing property.

The 10% figure is what you are legally liable for should you withdraw from the purchase after exchange of contracts (which you won t). Your solicitors will ensure exchange on your purchase only happens after exchange has happened on the sale of your existing property. It might be a matter of seconds between the two exchanges of contracts.

Thanks, it s incredibly frustrating as there is so much conflicting info out. Appreciate your response

As an aside, if you withdraw from the purchase you're legally liable for 100%, not just 10%.

[Jeremy-75qq8]

If your purchase requires a 10 % deposit and your sale requires the same the cash flows add as follows


Sale £150k

Buyer pays £15k deposit.

This £15k is either paid by their lawyer to your lawyer or held by their lawyer to the order of your lawyer via a solicitors undertaking depending on timescale and who agrees what.

Purchase £300k.

You pay £30k to your sellers solicitor.

This is then funded by the incoming £15k and another £15k that you give your lawyer.

If you don't have £15k then tell your lawyer and it is highly likely that the lawyers and your seller will agree a reduced deposit of 5% on exchange.

If for some reason they won't agree to 5% and you don't have any money the deal falls through .

[Opapayer]

Jeremy-75qq8 said:

If your purchase requires a 10 % deposit and your sale requires the same the cash flows add as follows


Sale £150k

Buyer pays £15k deposit.

This £15k is either paid by their lawyer to your lawyer or held by their lawyer to the order of your lawyer via a solicitors undertaking depending on timescale and who agrees what.

Purchase £300k.

You pay £30k to your sellers solicitor.

This is then funded by the incoming £15k and [b’another £15k that you give your lawyer. [/b]

If you don't have £15k then tell your lawyer and it is highly likely that the lawyers and your seller will agree a reduced deposit of 5% on exchange.

If for some reason they won't agree to 5% and you don't have any money the deal falls through .

This is nonsense. Do you think that everyone moving home is cash rich and throwing it at their solicitor? Deposits are not paid in cash where the equity in the existing home is the deposit. There is no cash transfer, it is all a paper exercise. The deposit comes from the equity. Only first time buyers, or those buying without a house to sell will provide cash to their solicitor.

One of the questions asked by your solicitor is where is the deposit coming from. The answer is equity form the sale and they know how to deal then. This process is well practised and the way the UK housing market works. If it didn’t and worked the way that you’re suggesting then the whole housing market would grind to a halt as few people have cash sloshing around to fund large deposits when moving upwards.

[GasEngineer]

Opapayer said:

Only first time buyers, or those buying without a house to sell will provide cash to their solicitor.

Isn't it as mentioned above that the deposit is an agreement to pay the 10% if the buyer does not proceed with the purchase rather than first time buyers actually having to find large amounts of cash?

[Opapayer]

GasEngineer said:

Isn't it as mentioned above that the deposit is an agreement to pay the 10% if the buyer does not proceed with the purchase rather than first time buyers actually having to find large amounts of cash?

The OP was asking about cash flow and does he have to physically pay the 10% to his solicitor from his bank account. The answers given were highly confusing, many suggesting that he does. He doesn t. That s the question that I was answering.

First time buyers do need to stump up the cash. Their deposit is due on completion, but nearly always paid to the solicitor on (or before) exchange.

The 10% is a number that custom and practice has created to apply standardisation to the process. It is effectively a penalty amount to dissuade anyone from withdrawing from the purchase / sale post exchange. In theory, both sides are supposed to deposit this amount to their solicitor to demonstrate they're committed to the deal. Any penalty isn t technically limited to that amount it could go higher, even higher than the price of the house. Theoretically.

The reality is that it s all words on paper. Everything that could go wrong is covered off pre-exchange. And on exchange the buyer should ensure their life cover, house insurance etc is all in force, to cover off catastrophes like death, fire etc. Everyone who has ever been in a chain knows that they haven t handed over any deposit money to their solicitor unless they were either at the bottom of the chain, or didn t have sufficient equity to cover the difference between purchase price and mortgage.

The solicitors / conveyancers acting for the buyers / sellers in the chain know the process, it s standardised around the flow of money. It really is simple.

You will probably hand over some money to your solicitor along the way to cover immediate disbursements (expenses that the solicitor wants upfront), but most including their fees are usually paid on completion when all the mo ones get divvied up.

[TA14]

GasEngineer said:

Opapayer said:

Only first time buyers, or those buying without a house to sell will provide cash to their solicitor.

Isn't it as mentioned above that the deposit is an agreement to pay the 10% if the buyer does not proceed with the purchase rather than first time buyers actually having to find large amounts of cash?

As mentioned above, it's a lot worse than that, for example in the OP's case, if a £30K deposit is paid on a £300K house and then the buyer pulls out followed by remarketing and a sale at £200K then the original buyer is liable for the shortfall of £70K (£100K - £30K) plus other associated costs, such as hotel fees.

[Opapayer]

TA14 said:

As mentioned above, it's a lot worse than that, for example in the OP's case, if a £30K deposit is paid on a £300K house and then the buyer pulls out followed by remarketing and a sale at £200K then the original buyer is liable for the shortfall of £70K (£100K - £30K) plus other associated costs, such as hotel fees.

Anyone who pulls out of the deal after exchange is an idiot. There is plenty of time pre-exchange to withdraw. Exchange is the legal commitment stage. So it’s right that there are big penalties. The 10% is just a standard number that becomes immediately payable amd indisputable if you withdraw. The balance in your example usually requires some more steps to be able to enforce it.

[TA14]

Opapayer said:

TA14 said:

As mentioned above, it's a lot worse than that, for example in the OP's case, if a £30K deposit is paid on a £300K house and then the buyer pulls out followed by remarketing and a sale at £200K then the original buyer is liable for the shortfall of £70K (£100K - £30K) plus other associated costs, such as hotel fees.

Anyone who pulls out of the deal after exchange is an idiot. There is plenty of time pre-exchange to withdraw. Exchange is the legal commitment stage. So it s right that there are big penalties. The 10% is just a standard number that becomes immediately payable amd indisputable if you withdraw. The balance in your example usually requires some more steps to be able to enforce it.

The way that I look at it is the 10% paid is the money that will be used to sue you if you fail to complete.

[Opapayer]

TA14 said:

The way that I look at it is the 10% paid is the money that will be used to sue you if you fail to complete.

That would be your choice. The point remains that there is a vanishingly small number of properties that will fail to complete post exchange of contracts. Vanishingly small.

[DonkeyApple]

PistonRings said:

This is our first time selling and buying and I m looking for a sense check (maybe ELI5)

Using easy numbers as example just to keep the situation simple:

We are selling for 150k, buying for 300k.
We have 75k equity, this is being used to place a 60k deposit, pay stamp duty and the remaining 10k back to us.
We ve received contracts and it says, on both The terms of the Contract state that the Buyer is liable to pay a 10% deposit

I asked solicitor does this mean she s expecting us to transfer 30k cash before exchange however her response before she seemingly finished for the day was In regards to the contract deposit this is always 10% and is not the same as your mortgage deposit .

Have I misunderstood what she s asking ? Is this standard practice? It s struggling to understand how this would even be correct, our mortgage etc is all on the value of 60k down etc.

The key here is that the contract makes you liable for 10% but isn't stating that you must send any money anywhere. By signing you're just agreeing that if you bail then you owe 10%.

Re the second bold this is just down to the solicitor not reading or understanding your question. Probably a 'wood for the trees' scenario where the professional doesn't appreciate the position of the novice etc.

[TA14]

DonkeyApple said:

The key here is that the contract makes you liable for 10% but isn't stating that you must send any money anywhere. By signing you're just agreeing that if you bail then you owe 10%.

The key might be that you need to read this thread and correct your statement