What is the difference between vendor deposit and bank deposit?

Buying or selling a home in Melbourne comes with a lot of jargon. Two terms that cause the most head scratching are vendor deposit and bank deposit. They sound similar, yet they mean very different things and sit under different rules. If you're in the thick of a sale or gearing up to make an offer, understanding the difference will save you stress, help you avoid scams, and keep your settlement on track.

Below I break it down in plain English, with Melbourne specific tips and the key Victorian rules you're likely to bump into.

The Short Answer

A vendor deposit is the amount a purchaser pays under the contract of sale to secure the property. In Victoria this is commonly 10 percent, and it is paid to a stakeholder such as the agent or conveyancer into a regulated trust account. It is usually held there until settlement unless an early release applies.

A bank deposit is money you hold with a bank or similar institution. Think savings accounts and term deposits. It earns interest, sits under banking rules, and is protected by the Australian Government's Financial Claims Scheme up to $250,000 per account holder per authorised deposit taking institution.

What Exactly Is a Vendor Deposit?

When you sign a contract to buy a property in Victoria, you normally pay a deposit. The amount is negotiable but is often 10 percent of the price. This money goes to a stakeholder for safekeeping, usually the selling agent's trust account or your conveyancer's trust account. It is not paid to the seller's personal bank account. The money stays put until settlement unless certain legal steps are taken for an early release. If the contract conditions are not met, the deposit can be refunded. If you default, the vendor may be able to keep it depending on the contract.

Those trust accounts are tightly regulated in Victoria. Estate agents and conveyancers must open approved trust accounts, keep strict records, and undergo audits.

Early Release of the Vendor Deposit

You'll often hear about a "Section 27" or "s27". Section 27 of the Sale of Land Act 1962 allows a vendor to request the deposit be released before settlement. To do that, the vendor serves a Section 27 statement that discloses finance details and other required information. The purchaser then has time to object. The courts have confirmed this release is a statutory process, not something the parties can rewrite in the contract. In practice early release often fails because the strict conditions are not met or the purchaser objects. If the release does not go through, the money simply stays in trust until settlement.

What Exactly Is a Bank Deposit?

A bank deposit is your money held with an Australian bank, building society or credit union. Term deposits lock your money away for a set period for a fixed interest rate. Savings and transaction accounts are at call and usually pay variable interest. These products are regulated by APRA and, importantly, eligible deposits are covered by the Financial Claims Scheme up to $250,000 per account holder per ADI if an institution fails. That protection is designed to give you quick access to your money in a crisis.

Side by Side: Vendor Deposit vs Bank Deposit

Purpose: The vendor deposit shows you're committed to the purchase and secures the contract. A bank deposit is just where you store and grow your money.

Who holds it: Vendor deposit sits in a stakeholder's trust account operated by an agent or conveyancer. A bank deposit sits in your bank account.

Regulation and protections: Trust accounts are monitored and audited under Victorian laws, with compensation available from the Victorian Property Fund if trust money is misused. Bank deposits are regulated by APRA and eligible deposits are covered by the Financial Claims Scheme.

Access: Vendor deposit is generally locked until settlement unless a valid Section 27 release occurs. Bank deposits are accessible according to your account or term deposit conditions.

Returns: Vendor deposit does not earn you interest while it sits in trust. Bank deposits may pay interest.

What it counts toward: On settlement, the vendor deposit is applied to the purchase price. A bank deposit is simply a source of funds you can draw on for the purchase.

Common Melbourne Scenarios Explained

"I have saved a bank deposit. Is that the same thing?"

Not quite. When people say they've "saved a deposit", they usually mean they have saved up a lump sum in a bank to put towards buying a home. Lenders often want you to contribute about 20 percent of the price from your own funds to avoid lenders mortgage insurance, although many buyers enter the market with 10 or 5 percent using LMI or government schemes. That savings pot does not automatically become the vendor deposit. You still need to pay the vendor deposit into trust under the contract and then bring the rest to settlement.

"Do I always have to pay 10 percent?"

No. Ten percent is common in Victoria, but it is not set by law. Many private sales proceed with 5 percent or another amount the vendor accepts. The contract will specify how much is due on signing and whether a part deposit is allowed with the balance by a certain date. Auctions often require 10 percent on the day unless agreed otherwise beforehand.

"Can the vendor ask for the deposit before settlement?"

Yes, they can ask using the Section 27 process. The purchaser can object within the prescribed time if the legal requirements are not satisfied. If there is an objection or the lender details do not check out, the funds remain in trust until settlement. Practically speaking, early release is far from guaranteed.

"What if the stakeholder's trust account is compromised?"

Trust money is meant to be kept separate and audited. If an agent or conveyancer misuses trust funds, Consumer Affairs Victoria can prosecute and the Victorian Property Fund can compensate eligible consumers who have suffered loss from misappropriated trust money. Real cases in Victoria show how seriously this is taken and why you should only deal with licensed professionals.

Paying the Vendor Deposit Safely

Unfortunately, payment redirection scams target property transactions because the amounts are large. Scammers hack or spoof emails and send fake invoices with altered bank details. A simple phone call to your conveyancer using a known number before transferring money can save you hundreds of thousands of dollars. Australian regulators and banks urge buyers to verify any account changes and to be sceptical about email instructions for deposits or settlement funds.

In Victoria, many settlements are completed electronically using PEXA, which has particular processes for source funds and trust accounts. Your conveyancer will advise whether your deposit needs to go to a trust account or through a PEXA source account for settlement. Always use account details provided directly by your conveyancer and never by a forwarded email from a third party.

What About Deposit Bonds?

If you do not have liquid cash for the vendor deposit, a deposit bond can sometimes be used. A deposit bond is a guarantee issued by an insurer or lender to the vendor that the deposit will be paid at settlement. It is not cash and it comes with fees and conditions. Whether a vendor accepts a bond depends on the contract and negotiation.

A Quick Timeline for a Typical Melbourne Purchase

1. Before you offer: Review the Section 32 vendor statement. This is the disclosure document required by law that you should read before signing. Ask questions about title, services, owners corporation fees, and any notices or charges that affect the land.
2. Signing the contract: You pay the vendor deposit into the stakeholder's trust account per the contract. Keep your receipt and confirm the trust account name matches the agent or conveyancer, not an individual.
3. Cooling off or conditions period: If there are finance or building and pest conditions, these must be satisfied by the dates in the contract. If a condition fails, the deposit is usually refunded.
4. Before settlement: Your lender and conveyancer finalise figures. If the vendor seeks a Section 27 early release, your conveyancer checks the statement and advises whether to object.
5. Settlement day: The vendor deposit is applied to the price. You or your lender contribute the rest through your bank or via PEXA. You get the keys once transfer and funds are complete.

Frequently Asked Questions

Is my vendor deposit government guaranteed like money in the bank?

No. The Financial Claims Scheme protects eligible deposits held with Australian banks and similar institutions up to $250,000 per account holder per ADI. A vendor deposit is trust money for a property transaction and sits under a separate Victorian framework that includes auditing and potential compensation through the Victorian Property Fund if trust money is misused. Different systems, different safeguards.

Who decides the deposit amount in Victoria?

It is negotiated. Ten percent is common, five percent is regularly accepted in private sales, and the contract will set out the timing.

Will I earn interest on my vendor deposit?

No. It is held in trust and does not pay interest to you. If you want returns while you're saving for a home, that's where bank deposits such as savings accounts or term deposits come in.

When should I be wary?

Be very careful if you receive any email asking you to change payment details for your deposit or settlement. Confirm by phoning your conveyancer on a number you already have, not one in the email. Payment redirection scams are a real risk in property transactions.

Key Takeaways

The vendor deposit secures the contract and is held in a regulated trust account, normally until settlement. It is not the same as the savings you hold with your bank.

Bank deposits are your savings with an ADI. They can earn interest and are covered by the Financial Claims Scheme up to the cap.

Early release of the vendor deposit in Victoria requires a valid Section 27 process and is not guaranteed.

Protect yourself against payment redirection scams by verifying account details directly with your conveyancer and understanding how electronic settlement works.

Need Help With the Fine Print?

If you're buying or selling around Melbourne, lean on a local conveyancer who can translate the legal steps into plain advice. At Pearson Chambers Conveyancing, we review Section 32 vendor statements daily, explain how your vendor deposit will be handled in trust, and map out your path to settlement with no surprises.

Contact Pearson Chambers Conveyancing for friendly advice and a free Section 32 contract review

Phone: 03 9969 2405

Email: contact@pearsonchambers.com.au