Deposit Forfeiture for Melbourne First Home Buyers

We get asked this by first home buyers, usually after a lender has gone quiet, a settlement date is getting close, or an auction deposit suddenly feels very real.

The short answer: In Victoria, if a buyer defaults under a contract of sale and the vendor properly ends the contract, the vendor can usually keep the deposit, commonly up to 10 per cent of the purchase price. Under the standard contract, the vendor usually needs to give a written default notice and 14 days to fix the default before the deposit is forfeited. A valid cooling-off, finance, or building inspection termination is different: if you end the contract the right way, your deposit should come back, subject to any cooling-off penalty.

What does deposit forfeiture mean in Victoria?

Deposit forfeiture means the vendor keeps the buyer's deposit because the buyer has defaulted and failed to complete the purchase. For Melbourne first home buyers, the risk usually appears when finance falls over, settlement money is short, or a buyer tries to walk away after the contract has become unconditional.

The deposit is not a casual holding fee. It is meant to show you are serious about the purchase and to give the vendor some security if you do not settle. The usual deposit in Victoria is 10 per cent of the price, though smaller deposits are sometimes negotiated, especially for first home buyers using savings, gifts, or government support.

The money should not simply be pocketed by the vendor on signing day. It is usually held by a stakeholder, often the estate agent, vendor's conveyancer, or legal practitioner, in a trust account until settlement, written agreement, or another proper release event. So when people talk about losing the deposit, they are talking about a legal result, not the agent handing the vendor your money after one bad phone call.

When can a vendor keep a buyer's deposit?

A vendor can usually keep the deposit only after the buyer has defaulted and the vendor has properly ended the contract. A buyer default might include failing to settle on the due date, failing to pay the agreed deposit, or making clear they will not complete the purchase.

The standard Victorian contract gives buyers an extra buffer before the worst happens. General condition 34 usually requires a written default notice. That notice must explain the default and give the buyer 14 days to fix it, including paying reasonable costs and interest where they apply. General condition 35 then deals with what happens if the default is not fixed and the contract ends.

If the notice period expires and the buyer still has not settled, the vendor may be entitled to:

keep the deposit, usually up to 10 per cent of the purchase price
take possession of the property if relevant
resell the property within the contract period
claim further loss, such as a resale shortfall and reasonable resale costs
give credit for the deposit already kept when calculating any further claim

That last point matters. The deposit is not meant to be counted twice. If the vendor keeps a $70,000 deposit and later claims a $40,000 resale loss, the deposit should be credited against that loss.

There can be exceptions to the default notice path. If a buyer clearly says or acts as if they will not perform the contract at all, the vendor may argue the buyer has repudiated the contract. That is a serious step. If you are thinking, 'I just can't go ahead', get advice before you say anything final or pull out before settlement.

How much deposit can be forfeited?

For an established home, townhouse, or apartment, a 10 per cent deposit is the usual amount treated as a true deposit. Consumer Affairs Victoria also explains that there is no general law setting the deposit amount for a property sale, even though 10 per cent is the common practice.

For first home buyers, that can feel harsh. A 10 per cent deposit on a $720,000 unit in Preston is $72,000, which may be years of savings. The law treats that deposit as more than a part payment. It is also security for performance, so a buyer who defaults cannot assume a court will simply refund it because the amount feels painful.

There is a practical ceiling. A deposit well above 10 per cent may be open to challenge as a penalty rather than a genuine deposit. That is not the type of argument you want to run after settlement has failed. If a vendor asks for a deposit above 10 per cent, or a contract has unusual default wording, get the contract reviewed before you sign.

Off-the-plan contracts are different. In Victoria, off-the-plan deposits are capped at no more than 10 per cent of the contract price. That is one reason buyers looking at new apartments around the CBD, Southbank, Footscray, or Box Hill should have the contract checked carefully before handing over money.

Is using cooling off, finance, or inspection rights a default?

No. Ending a contract through a valid contractual or statutory right is not the same as defaulting. If you use the right properly, the deposit is usually refunded, with any cooling-off deduction where that applies.

The main buyer exits to understand are:

Cooling off: Most private sale residential buyers get three clear business days after signing to cool off. The cooling-off period does not usually apply to auction purchases or sales made within three clear business days before or after a public auction. If cooling off is valid, the buyer gets a refund less $100 or 0.2 per cent of the price, whichever is greater.
Subject to finance: A subject to finance clause can let a buyer end the contract if the named lender does not approve the loan by the due date, but only if the buyer has complied with the clause.
Building inspection: A properly activated building inspection clause may let a buyer end the contract if the report reveals defects that satisfy the contract wording.

The key word is 'properly'. In our practice, we've seen deposit stress arise when buyers thought a finance clause would protect them automatically, then missed the notice date or applied for a different loan from the one written in the contract. Those small details can change a protected exit into a default.

Why do finance dates cause deposit forfeiture problems?

Finance dates cause trouble because they expire quietly. If the finance date passes and no valid termination notice or extension has been arranged, the contract may become unconditional, even if the bank has not given formal approval.

Picture a first home buyer purchasing a two-bedroom unit in Coburg for $620,000. She pays a $62,000 deposit and has a finance clause due in 21 days. Her broker says the loan is 'looking good', but the lender's valuation is delayed. The finance date passes without written extension or termination. A week later, the bank declines the loan.

At that point, the buyer may no longer have the finance clause to rely on. If she cannot settle, the vendor may serve a default notice requiring settlement within 14 days. If she still cannot complete, the vendor may end the contract and seek to forfeit the deposit.

That result may have been avoidable. A conveyancer could have asked for an extension before the finance date, or served a termination notice if the clause allowed it. This is why contract dates need to be treated like tram timetables when you're already running late: miss one and the rest of the trip gets harder.

Can a court order a forfeited deposit to be returned?

Yes. Section 49(2) of the Property Law Act 1958 (Vic) gives the court power to order repayment of a deposit. For a buyer who genuinely defaulted, that power is not a dependable safety net.

A court looks at what is fair in the circumstances. The buyer's conduct, the vendor's conduct, the contract terms, the size of the deposit, and the financial result for both sides may all matter. But courts do not usually refund a standard 10 per cent deposit just because the buyer is a first home buyer or because the vendor later resells well.

A court application can also be slow, stressful, and expensive. For most buyers, the better protection is to avoid default in the first place: get advice before signing, keep every date in view, and act fast if finance, inspection, or settlement starts to wobble.

What should Melbourne first home buyers do before signing?

The safest time to protect your deposit is before the contract is signed. Once you win at auction in Brunswick, have an offer accepted in Sunshine, or sign for an apartment in Docklands, your options narrow quickly.

Before signing, check:

Deposit amount: Is it 10 per cent, five per cent, or another amount? When must the balance be paid?
Cooling-off position: Is the sale by private sale, auction, or close to an auction date?
Finance wording: Does the clause name the correct lender, loan amount, and approval date?
Inspection wording: Is the inspection condition activated, and does it give you enough time?
Default clauses: What costs, interest, and notice rules apply if something goes wrong?
Special conditions: Do any vendor drafted special conditions weaken your usual rights?

A complimentary Section 32 contract review is designed to catch these issues while you still have room to negotiate.

What should you do if settlement is at risk?

Act early. The day you think there may be a problem is the day to contact your conveyancer, not the day after a default notice arrives.

A practical plan is:

Tell your conveyancer what has changed.
Send any lender, broker, building inspector, or agent emails straight away.
Check the exact contract deadline, not a date saved from memory.
Ask whether an extension, valid termination, or settlement solution is available.
Do not tell the agent or vendor you are walking away until you have advice.
Keep written records of every step.

Vendors often prefer a short, clear extension to the cost and delay of putting the property back on the market. That conversation is easier when it happens before the deadline, with a sensible plan attached.

Frequently asked questions

What is deposit forfeiture?

Deposit forfeiture is when a vendor lawfully keeps a buyer's deposit because the buyer defaulted under the contract and failed to complete the purchase. In Victoria, this usually follows a written default notice and the end of the contract under the standard contract conditions. The amount forfeited is commonly up to 10 per cent of the purchase price.

Can I get my deposit back if a sale falls through?

You may get your deposit back if the contract ended through a valid cooling-off right, finance condition, building inspection condition, or another proper termination right. If the sale falls through because you defaulted and could not settle, the vendor may seek to forfeit the deposit. After that, recovery usually depends on agreement with the vendor or a court order.

How much can a vendor keep in a deposit forfeiture?

A vendor will usually seek to keep the agreed deposit, commonly up to 10 per cent of the purchase price. A standard 10 per cent deposit is generally treated as a true deposit rather than a penalty. A deposit above 10 per cent should be reviewed carefully before signing, especially for first home buyers.

Does a vendor have to warn me before forfeiting my deposit?

Usually, yes. Under the standard Victorian contract, the vendor generally needs to serve a written default notice giving the buyer 14 days to fix the default and pay applicable costs and interest. A clear refusal to complete the contract may create a different legal position, so buyers should get advice before saying they cannot go ahead.

Can a court reverse a deposit forfeiture?

Yes, section 49(2) of the Property Law Act 1958 (Vic) gives the court power to order repayment of a deposit. For a buyer who has genuinely defaulted, repayment is not automatic and should not be treated as a fallback plan. Courts look at fairness, conduct, and the facts of the contract.

Is my deposit at risk if I use my cooling-off rights?

No, if the cooling-off right applies and is used correctly. In a private sale, most residential buyers have three clear business days after signing to cool off and receive a refund, less $100 or 0.2 per cent of the price, whichever is greater. Cooling off usually does not apply to auction purchases or sales close to a public auction.

About the Pearson Chambers Conveyancing team

Pearson Chambers Conveyancing is a Melbourne-focused conveyancing team helping first home buyers review contracts, understand Section 32 statements, and settle Victorian property purchases with less stress. We work with buyers across houses, apartments, and townhouses, from inner-city auctions to private sales in the suburbs. Deposit wording, default notices, finance clauses, and inspection rights are part of what the PC team checks day to day.

Sources we consulted

Worried about losing your deposit? Talk to us before you sign

Pearson Chambers Conveyancing can review your contract and Section 32 statement before you commit, so you understand the deposit, default clauses, finance dates, and inspection rights in plain English.

We offer a complimentary Section 32 contract review for Melbourne and Victorian buyers.

Email: contact@pearsonchambers.com.au

General information only, current as at the date of publication. Victorian conveyancing rules and legislation change frequently. Please contact the Pearson Chambers Conveyancing team for advice on your specific contract.