When you are ready to buy your next  house there are two separate “deposits” that get discussed. This can be confusing. This article will explain how your hard earned deposit is used and when to pay this. Not too worry – you don’t need twice as much savings!

There is the deposit that you pay to the real estate agent, known as the purchase deposit. And there is the amount you need so the bank or lender will lend you the rest of the purchase price – the equity deposit. This to ensure the lender does not have too higher exposure (risk) against the property and they comply with Reserve Bank (RBNZ) requirements. Think of your total amount of savings available to you, paid at different times to different parties in the transaction.

If you want to know how much deposit you need to buy a house please read the articles Buying your First Home in New Zealand and How to Buy a House with a 5% Deposit.

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 as a show of good faith to (hopefully) secure the property. 

The purchase deposit is recorded on the Sale & Purchase Agreement. Check with the Real Estate Agent that this is refundable if you do not buy the property and that the funds are held in their trust account.

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. They will make the withdrawal application for 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 Agent like usual). 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 address this.

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 Reserve Bank lending restrictions which restrict banks lending high loan-to-value ratio borrowing. (Think too many loans to people with less than 20 per cent deposit).

Note: Banks and lenders refer to anyone purchasing with a deposit less than a 20% of the home’s value as high loan-to-value ratio (LVR) borrowing. 

Quick Example:

If you want to buy a $900,000 home, you require a minimum deposit of $90,000 (10%) unless you are eligible for a Kāinga Ora ‘First Home Loan’. 

1. When you make an offer and want to secure the house under contract – you may choose to pay $45,000 (5%) to the Real Estate Agent.
2. The remaining $45,000 or 5% will be paid to your lawyer and transferred to the Vendor on settlement day.
3. The bank or lender transfer $810,000 or 90% of the purchase price to your lawyer who transfers it on to the Vendor.

We are here to help you understand all aspects of buying and selling houses in New Zealand. Please don’t hesitate to get in touch by clicking ‘Let’s Meet’ or simply phone Mike on 021-402-508.