Good Faith Deposit vs Security Deposit

The Differences

The Good Faith Deposit and the Security Deposit are often mistaken for one another and used interchangeably. This guide aims to set out their differences.

Both are intricately related to the Letter of Intent and Tenancy Agreement, respectively, and there will, as such, be considerable overlap with the associated guides.

As lined out in the rental timeline, you, as a tenant, will, throughout the rental procedure, sign and exchange two files: the Letter of Intent (LOI) (a common practice) and the Tenancy Agreement (TA) (obligatory). Each comes accompanied by a financial deposit.

The Letter of Intent goes hand in hand with the Good Faith Deposit, whereas the Tenancy Agreement goes with the security deposit.


Difference I

What is a Good Faith Deposit? The Good Faith Deposit provides credibility and financially underscores your intentions to venture into a rental scheme with the landlord.

It demonstrates that you, as the tenant, is agreeable to the terms in the Letter of Intent and ready to commit to a rental agreement with the prospective landlord.

After receiving your Good Faith Deposit and Letter of Intent, the landlord will cease to consider other potential tenants and draw up a Tenancy Agreement.

What is a security deposit? After the Tenancy Agreement is signed, the Good Faith Deposit usually becomes the security deposit.

The security deposit additionally functions as compensation for the landlord if the tenant damages the property due to negligence or as a refund should the tenant terminate the lease prematurely.

Both deposits generally comprise one month’s rent for a one-year lease and double for a two-year lease.


Difference 2

The Good Faith Deposit only serves its purpose for a couple of days. Upon signing the TA, it is converted either into the security deposit or a rental advance.

On the other hand, the security deposit will last until the termination of the lease. After the lease ends, it’s returned to the tenant, provided that there is no reason (damages caused to the unit or lease prematurely terminated) to withhold it.

Seeing that the security deposit lifetime is significantly lengthier, there will be the added consideration of interest.


When can I get my security deposit back?

Commonly, your security deposit will be returned at the end of the lease without an added interest payment.

In the larger scheme of things, the loss in real value over one or two years will generally be limited, and this is probably not a point of contention.

To ensure you get your security deposit back on time and avoid unwanted disputes, make sure your Tenancy Agreement has these clauses written in before signing:

The landlord must seek confirmation in writing before deducting from the security deposit for issues such as late rent payment or to cover property damages.

The security deposit must be refunded in full to tenant within 2 weeks from the end of lease.

First time renting? Read this article about the 10 things to ask when renting in Singapore.


Difference 3

While there are some additional differences, they are generally inferable from the first two differences as outlined above. Apart from differences in purpose and lifespan, the Security Deposit also differs in that it is stated in both the Letter of Intent and the Tenancy Agreement.

In contrast, the Good Faith Deposit is usually only detailed in the Letter of Intent.

As noted previously, the Letter of Intent is not obligatory, whereas the Tenancy Agreement is. If the Letter of Intent as an intermediary procedure is skipped, naturally, the Good Faith Deposit is omitted.

People always get confused about the good faith deposit and the security deposit

People always get confused about the good faith deposit and the security deposit

Make the Good Faith Deposits legally binding

On a final yet important note, both the Good Faith Deposit and the security deposit should be conditioned; the security deposit in both the Letter of Intent and Tenancy Agreement, and the Good Faith Deposit solely in the Letter of Intent.

A clause should be included, stipulating precisely under what conditions either deposit is forfeited or refunded to avoid disagreements down the line.



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