Deposit and bank guarantee: what’s the difference?
Has your offer been accepted? Congratulations! Time now to sign the contract. The contract will often state that the seller requires a deposit of 10% of the sale price. You can pay this sum from your own money, but another option is to get a bank guarantee. This article tells you more.
When you sign a sale contract, you do not immediately become the owner of the house. You still have to arrange your mortgage first. When that’s been sorted out you can go to the notary for the act of delivery, and at this point you become the official owner.
Why a deposit?
In the meantime, the seller wants to be sure the sale will go through. This is why your sale contract includes a deposit. Think of this deposit as a kind of compensation for the seller in case the sale falls through.
The deposit is normally 10% of the home sale price. You don’t pay it directly to the seller, it goes through the notary. They will manage the deposit until the sale is final. If the sale goes through then the deposit will be returned to you (minus any deposit from your own money). It’s that simple.
If the sale falls through and you don’t have a valid reason for this, you have to release the deposit to the seller through the notary. You are unable to meet your obligations towards the seller, so this way the seller receives a kind of compensation for the missed sale.
Out of pocket or bank guarantee?
You can pay the deposit yourself. However, 10% of the sale price is usually still a hefty sum and not everybody has that kind of money sitting in their savings account. That’s why you can also opt for a bank guarantee.
With a bank guarantee, a third party promises to finance the deposit if the sale falls through. This party doesn’t need to be the same as your mortgage provider, and in fact it very often isn’t. At Viisi, for example, we often work with BNP Paribas for bank guarantees. You’ll sign a separate agreement with the provider for the bank guarantee. If the sale goes through this agreement terminates.
If the sale falls through and you don’t have a valid reason for this, then the deposit goes to the seller through the notary. With a bank guarantee, this is financed by the provider. The bank guarantee is then converted into a loan which you have to pay back to the provider.
Bank guarantee fees
Fees for bank guarantees vary from provider to provider. It is often 1% of the deposit, but some providers charge less – or even nothing at all. The notary will deduct these fees upon transfer.
The sale has fallen through, what happens now?
Above, we mentioned having a “valid reason” for the sale not going through a couple of times. If you can’t give a valid reason for cancelling the sale, you will lose your deposit. Quite bad luck, really – no new house and a chunk of your savings gone, or debt through the bank guarantee. That’s why we recommend the following:
1. Think it over
The sales contract always states that you have three days to think things over. In that time, you can withdraw from the sale without giving any reason. If you do this, you won’t owe the seller a deposit.
2. Conditions precedent
As a buyer, it’s always a good idea to include conditions precedent in your contract. The conditions precedent can allow you to withdraw from the sale without paying the sale price or deposit.
The most well-known condition precedent is the financing reservation. If your mortgage application has been turned down by several lenders, you won’t be able to buy the house after all. If your contract includes the condition precedent of a financing reservation and you invoke it before the agreed closing date, you will not owe the seller a deposit. This means in almost all cases it’s a good idea to include a financing reservation as a condition precedent!
Another common condition is a structural reservation. This means that you can withdraw from the sale if there are serious defects to the house or if the costs for repairing any defects are more than agreed. This term has been included in sale contracts as standard since 01 February 2018.
Viisi’s advisors would be happy to work out whether it makes sense for you to pay the deposit out of pocket if you’re able to. If you opt for a bank guarantee we’d love to help you arrange one. Simply organise a telephone consultation to discuss your situation.