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First Home Buyers – is there one Deposit or two?
A young couple were looking to purchase their first home. They talked to the bank about needing a certain ‘deposit’ in order to obtain their finance approval. They then went to make an offer on a property and became confused when they were asked by the agent to enter a ‘deposit’ in the Agreement.
When looking to purchase a home with the assistance of bank funds, there are two completely separate “deposits” that you will encounter. The same terminology is used for both, so it can be quite confusing. Below are the different types of deposit.
Bank’s requirements for deposit…
Banks require their customers to contribute cash to a certain level for a property purchase, before they will commit to lending to their customers. Banks call this cash contribution a “deposit” and it is generally required to be at least 20% of the total purchase price of the property you are purchasing. Essentially this 'deposit' is your own savings and is made up of what you have saved in your bank account and any kiwisaver funds that are eligible for withdrawal. For some purchasers this may also include a cash gift from a family member or liquidated investments.
Agreement deposit…
The 5-10% deposit in the Agreement for Sale and Purchase is part payment of the total purchase price for the property. This deposit is what you give the Vendor as consideration for entering into the Agreement until it progresses to settlement day, when the balance of the purchase price is paid (plus rates and any levies apportionments). So on settlement day, you are paying the purchase price, less the deposit already paid to the Vendor as recorded on the agreement for sale and purchase.
Kiwisaver funds used for payment of the deposit…
If you do not have quite enough savings for the deposit required under the Agreement, you are also able to use your KiwiSaver First Home Withdrawal funds to be applied to the payment of this deposit. If you decide to do this, you must first obtain a pre-approval letter from your KiwiSaver provider to establish your eligibility to withdraw your funds.
It is also really important that you ensure the timeframes for the withdrawal of the funds are accounted for in the deposit condition in the Agreement for Sale and Purchase, so you do not find yourself in a position where you are requesting an extension of time from the Vendor to pay the deposit. The Vendor is under no obligation to give you an extension and the Agreement may come to an end, which could be stressful and expensive for you.
If you are using your KiwiSaver funds to be applied to the deposit (or settlement) in the Agreement for Sale and Purchase, it is important to contact your legal advisor before signing the Agreement to ensure the timeframes for the deposit condition and the settlement date are in accordance with the timeframes required by your KiwiSaver provider.
For information regarding Rainey Collins’ First Home Buyers Q&A sessions, go to:
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