A woman was looking to purchase her first home and planned to offer $800,000 for the property. She looked at the draft Agreement for Sale and Purchase and noticed that the agreement said that a deposit equal to 10% of purchase price was payable upon signing that offer or upon the confirmation of any conditions in the Agreement.

She only had $15,000 sitting in her savings account but had $75,000 sitting in her KiwiSaver account. She assumed that was fine, and she could simply use her KiwiSaver funds to pay for most of the deposit.

Unfortunately, as a purchaser you cannot just go ahead and use your KiwiSaver funds to pay the deposit under the standard wording of the Agreement for Sale and Purchase. You will need to make sure the deposit is being held in accordance with the requirements of your KiwiSaver provider – otherwise your lawyer, who will receive the KiwiSaver funds from your provider, will be unable to pay those funds on to you to pay the deposit.

Below are some common misconceptions about the process and the terms used.

The deposit

When you are purchasing a property the term “deposit” turns up in two different contexts.

The deposit in the Agreement for Sale and Purchase is an early part payment of the purchase price as a sign of good faith to the vendor. It also is how the agent will get paid their commission before settlement.

When it is payable will depend on what the Agreement for Sale and Purchase says. Typically, it is specified as being on the acceptance of your offer or on the date that the last of any conditions in the Agreement are confirmed (also known as the ‘unconditional date’).

The other time the term “deposit” will turn up is when you are talking to your bank. What the bank means by “deposit” is the amount of your own funds (equity) you will ultimately be putting into the purchase. This may be on the settlement date for the purchase or paid early for the deposit under the agreement.  This includes your KiwiSaver funds as they will form part of your equity in the property.

Withdrawal process

If you are eligible to withdraw your KiwiSaver funds for a first home purchase, then you will need to complete a withdrawal form with your provider. Each KiwiSaver provider has their own form.

In the KiwiSaver First Home Withdrawal Form, it will ask you to advise whether you are going to use the funds to pay the deposit under the Agreement, with the remaining balance of your funds after payment of the deposit to be used for settlement. Alternatively, whether you wish to exclusively use your KiwiSaver funds to complete settlement on the settlement date. 

So while the funds can indeed be used to pay the deposit under the Agreement, there are two catches to using your KiwiSaver funds this way that you should be aware of:

1.    The withdrawal process is not quick.

Your withdrawal form to use the funds to pay the deposit cannot be sent until you have entered into the Agreement to purchase the property AND the funds do not come instantly. As a side note, it is important to remember that if you were using the funds for settlement, then the form could not be sent until the Agreement was unconditional.

The length of time it takes to receive the funds will vary between providers, however it can take up to 15 working days from the date they receive the application and supporting documents for the KiwiSaver provider to pay the funds to your lawyer.

So if your deposit was payable on acceptance or payable when you confirmed the Agreement and you confirmed two working days after acceptance of your offer, then it is extremely likely that the funds will not arrive in time. If the deposit under the Agreement is not paid in time then the vendor could cancel the Agreement.

This means that if you are using your KiwiSaver funds to pay the deposit then the Agreement will need to be amended so that the deposit is not payable before the KiwiSaver funds are available.

2.    The funds cannot be paid to just anyone

Your KiwiSaver provider will pay the funds to your lawyer’s Trust account and the lawyer undertakes to your KiwiSaver provider that they will only pay the KiwiSaver funds to someone who will hold the funds until settlement.

Under a standard agreement the deposit is payable to an agent who will not hold it until settlement. As previously stated, the deposit will be used to pay the agent’s commission and any balance will be given directly to the vendor (or their lawyer, who may pay it to the vendor) who can generally spend the funds however they wish before settlement has occurred, with some exceptions where mortgages are involved.

So, yet again, the Agreement must be amended so that the deposit is not paid to the agent or the vendor but to the vendor’s lawyer on the condition that the vendor’s lawyer undertakes that they will hold the funds until settlement (unless it is the purchaser’s fault that settlement does not proceed, in that case they can release the deposit to their client).

Unless the two above mentioned substantial changes are made to the standard Agreement for Sale and Purchase then it will not be possible, or practical, to use the KiwiSaver First Home Withdrawal to pay the deposit under the Agreement.

Instead, it would be better to amend the Agreement so that the deposit is not more than the funds you have readily available in a bank account. Alternatively, it may be worth talking to your bank to see if they can make an overdraft available to you to pay the deposit.

We also recommend withdrawing the KiwiSaver funds later (for settlement) as you can only make one withdrawal and more contributions will potentially have been added between the date the deposit is paid and settlement.

If for timing reasons (such as a quick settlement) or if the vendor/agent are insisting on a higher deposit, then your legal adviser will be able to help you amend the agreement so that you can use the KiwiSaver First Home Withdrawal to pay the deposit under the Agreement.

Similar changes are also needed if you are able to, and planning to, use the Kainga Ora First Home Grant to pay the deposit under the Agreement.

Withdrawing your KiwiSaver can be complex, especially if using it to pay the deposit.  It is important to take legal advice to ensure you don’t get caught out.

 

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Andie Donnelly