Two Types of Deposits When Buying a House
Two Types of House Deposits
When you are looking to buy a house there are two separate “deposits” that get discussed.
There is the deposit that you pay to the real estate agent (the purchase deposit) and there is the amount you need so the bank will lend you the rest of the purchase price (the equity deposit) to ensure the lender does not have too higher exposure against the property.
The purchase deposit:
When making an offer to buy a house, you will always be asked “how much deposit do you want to pay?” by the real estate agent. This is the purchase deposit and is usually between 5% and 10% of the purchase price. You pay the purchase deposit in cash as a show of good faith.
The purchase deposit amount is usually recorded on the front page of the Sale & Purchase Agreement.
It is recommended that the agreement state that the deposit is only payable when you confirm your conditions (not immediately upon signing). If the purchase deposit is not paid on time the vendor (seller) has options to cancel the Agreement or charge you penalty interest on the unpaid deposit.
You should have the Purchase deposit funds available when you make an offer to purchase. It should not be more than what you can pay from cash savings.
If you have no cash savings, then put “Nil” for the deposit.
What about KiwiSaver for the purchase deposit?
You must let your solicitor know early in the process so they can discuss this with you. The solicitor makes the withdrawal of your KiwiSaver eligible funds.
It is not easy to use your KiwiSaver to pay a purchase deposit under an Agreement for sale and purchase. Current timeframes for withdrawal of KiwiSaver funds are 10-15 working days. If your purchase deposit is payable before the KiwiSaver funds arrive then you risk the vendor cancelling the Agreement or charging you penalties.
Additionally, your KiwiSaver can only be paid to someone who promises to hold the funds on special terms until the settlement date (it therefore cannot be paid to the real estate agents like it usually is). If you plan to use your KiwiSaver for the purchase deposit under an Agreement then you must see your solicitor so any additional clauses can be added to the Agreement to address these issues.
The Equity Deposit:
The equity deposit is the total amount of money you are putting towards the house purchase. Currently, lenders will require you to have 10-20% of the purchase price before they will lend you the remaining 80-90%. This is due to rules mandated by the Reserve Bank to prevent too much high loan-to-value ratio borrowing.
Note: buyers purchasing with anything less than a 20% deposit is deemed high loan-to-value ratio borrowing.
As an example, for a $900,000 house, you need a minimum equity deposit of $90,000 (10%) to have finance approved by a lender, but the purchase deposit to secure the house under contract could be only $45,000 (5%); paid from your equity deposit.
We are here to help you understand all aspects of buying and selling houses, so don’t hesitate to call the friendly team at Meta Financial Solutions.
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