What Is Earnest Deposit In Malaysia, And Why Is It Usually 2%?
If you’ve ever tried to rent or buy a home in Malaysia, chances are that you’ve been asked for something called an ‘earnest deposit‘. So, what is earnest deposit anyway?
In simple terms, this is a deposit to demonstrate your committed interest to purchase or rent a property.
It’s an upfront financial commitment that shows you’re serious with your decision. An earnest deposit literally means: "I really am serious – here’s some money to prove it!".
While the term is also often used to describe a rental deposit, it’s more frequently used as a way of securing exclusive rights to buy a property in the subsale (sometimes called secondary) market.
A similar deposit in primary markets is more often called a ‘booking fee’, although the term earnest deposit may sometimes be used too.
How Does The Earnest Deposit Work?
The earnest deposit in Malaysia is designed to act as a guarantee of your interest, on the purchase of property. It’s generally 2% of the total value of the overall property.
Once this earnest money is paid, you’ve therefore locked in your interest, and the owner is no longer allowed to sell to another party for the duration of the agreement.
Typically the duration of that ‘lock-in’ deal is 14 days, in which time you need to secure further financing, usually a home loan.
It’s important that you pay the earnest deposit to an official third-party, which should generally be the agency that your property agent or solicitor belongs to.
This third-party then holds the money aside for payment when required, or refund in a limited set of circumstances.
They’re kind of like your trusted middleman-banker in this equation. We’ll talk a bit more about that below.
Don’t be tricked into paying your deposit directly to the owner, no matter how enticing the fake offer of a 60% discount on the property and free furniture might seem!
Apart from removing any protections you have around return of the money, there have been rare cases of fraud where an individual has impersonated an owner in order to trick potential buyers out of earnest money funds.
Of course, not every owner is out to trick you like this, but you can see why it’s best to go with that trusted third-party.
Aside from providing an impartial third-party to hold the funds, your property agent is essential for viewing and amending the earnest deposit agreement.
This ensures you understand what the money goes towards, what are the potential conditions of return, and ultimately when it will be paid to the buyer.
Do You Get Your Earnest Deposit Back?
The earnest deposit is an upfront part of the overall house payment. This means that, while under normal circumstances you don’t get it back, it does go towards paying the overall value owed on a property.
If you pay a 2% earnest deposit, that counts towards the overall 10% down payment made on a property. If you decide not to go ahead with the sale however, the earnest deposit is usually forfeited.
In some cases, you can potentially have your agent negotiate that a refund of the earnest deposit is allowed, based on the condition of the bank loan’s approval.
So, even if you eventually aren’t able to get a loan to purchase the house, the earnest deposit is returned.
Look out for clauses such as ‘subject to loan approval’ which indicates a condition is in place that enables a return of money in the event no loan approval is received.
How Much Of An Earnest Deposit Should I Put Down?
Contractually, you should put down as much as you owe! In real terms, that’s normally 2% of the total agreed value of the property.
Once again, it’s worth noting that this amount counts towards the 10% total value of your down payment.
If your potential purchase property is valued at RM200,000, that means your earnest deposit (2%) would be RM4,000.
That RM4,000 would count towards the total down payment (10%) of RM20,000, meaning you had an outstanding amount (8%) of RM16,000 due on the deposit.
Who Holds The Earnest Deposit Money?
We will say it again – make sure your earnest deposit is held by a professional third-party. That means not your Auntie Jane, not the guy you met at the mamak, and not the owner of the property either.
An impartial third-party ensures that fair and honest transfer of money occurs as per the agreement of the contract.
That’s particularly important as a buyer if your home loan approval fails, and you are looking for a refund on your payment.
Pay your earnest deposit to the agency which your agent represents. They will hold that deposit as a stakeholder and proof of your interest.
And make sure there’s a solid financial or legal trail! Don’t pop round the office with Ringgit notes stuffed in your pocket. When it comes to property, financial oversight and solid paperwork is key.
Ideally, you should be working with a reputable agent with a reliable history. Talk to friends or family if you want a recommendation.
If you’re at all worried, you can always check the Board of Valuers, Appraisers, Estate Agents and Property Managers‘ (BOVAEP) website for recommendations and a list of agencies.
What Happens If The Buyer Does Not Deposit The Earnest Money?
In the first instance, your money should be held by a professional third-party. That eliminates any problems around fraud, or even just carelessness, on the part of the owner.
In truth this shouldn’t really be a problem if you follow the best-practice recommendations.
If your money is paid to an impartial third-party, they should pass it on at the point home loan is approved or the terms of the contract are fulfilled.
That means legally, and contractually, you have paid the money and no longer owe the funds.
What’s more, with the right financial trail you can prove the money has been paid, meaning it does (as it should) go towards the overall 10% deposit owed.