What is the Difference between a Vendor Deposit and a Bank Deposit?

The main difference between a vendor deposit and a bank deposit is purpose. A vendor deposit, usually 10%, secures the property and is held in trust until settlement. A bank deposit, often 20%, secures your home loan and determines your Loan-to-Value Ratio. The vendor deposit forms part of your total bank deposit.

At Red Door Conveyancing, we believe a confident buyer is an informed buyer. A crucial part of that is understanding exactly where your money is going and why. So, let’s clear up the confusion and break down the two main types of deposits you’ll encounter on your home-buying journey. Think of them as two different jobs that your savings need to do.

Job #1: The Vendor Deposit (Securing the Property)

This is the deposit you pay when you sign the Contract of Sale. It’s also known as the ‘contract deposit’ or the ‘purchase deposit’.

• What is it? In Victoria, the vendor deposit is typically 10% of the total purchase price. It is paid by you, the purchaser, as a sign of your good faith and commitment to buying the property.
• What is its purpose? It serves as a security for the vendor (the seller). By paying this deposit, you are showing that you are serious about proceeding with the purchase. It also provides the vendor with a financial remedy if you back out of the contract without a legally valid reason—in which case, you risk losing your entire deposit.
• Where does the money go? This is a key point: your deposit money isn’t paid directly to the vendor when you sign the contract. It must be held securely in a neutral third-party’s trust account. This is usually the real estate agent’s trust account or your conveyancer’s trust account. The funds are only released to the vendor at settlement or in specific circumstances allowed by law (known as an ‘early release’).

Think of the vendor deposit as the ultimate promise. It legally and financially locks you into the contract, taking the property off the market while the settlement process unfolds.

Job #2: The Bank Deposit (Securing the Loan)

This is the deposit your bank or lender talks about. It’s the portion of the property’s purchase price that you contribute from your own funds when you take out a home loan. It’s often referred to as your ‘down payment’.

• What is it? It’s the chunk of your own savings you’re putting towards the house. The bank provides the rest of the funds as a loan.
• What is its purpose? The size of your bank deposit determines your Loan-to-Value Ratio (LVR). For example, if you have a 20% deposit, your LVR is 80%. A larger deposit lowers the bank’s risk, making you a more attractive borrower.
• The 20% Magic Number: You’ve probably heard that you need a 20% deposit. The reason this figure is so important is that if your deposit is less than 20% of the property’s value, most lenders will require you to pay Lenders Mortgage Insurance (LMI). LMI is a one-off insurance premium that protects the lender—not you—in case you can’t repay your loan. A 20% deposit helps you avoid this significant upfront cost.

How They Work Together: The Most Important Part

Here is the key takeaway: The vendor deposit is part of your bank deposit. They aren’t two separate pots of money.
Let’s use a simple example:

You are buying a house for $800,000.

• Your total savings for the purchase (your Bank Deposit) is $160,000 (which is 20%).
• When you sign the contract, you must pay the Vendor Deposit of $80,000 (10% of the purchase price).
• You pay this $80,000 from your total savings of $160,000. This money goes into the agent’s trust account.
• You now have $80,000 left in your savings.
• At settlement, your remaining $80,000 is combined with a $640,000 home loan from your bank to pay the vendor the final balance.

Understanding the difference is simple: the Vendor Deposit secures the contract with the seller, while your Bank Deposit secures the loan with the bank.

Knowing how these two crucial financial elements work together will empower you to budget effectively and approach your property purchase with clarity and confidence. If you’re ever unsure about your financial obligations when signing a Contract of Sale, don’t hesitate to reach out to the team at Red Door Conveyancing. We’re here to guide you home. Contact us on 03 8456 6797.