When embarking on the journey of buying a property, buyers will often encounter the term “deposit” from the Real Estate Agent and your Mortgage Adviser.

However, there are two types of deposit – one acts as a form of security for the vendor when you sign the sale & purchase agreement and the other refers to the amount of equity or personal contribution required by the lender to secure financing.

The Banks Perspective: Your Equity Contribution

Typically, lenders will want borrowers to contribute a specific percentage (usually 20%), to the property purchase as a deposit.

For instance, if you are considering purchasing a property for $750,000, the lender would expect you to provide a deposit or equity contribution of $150,000 (20% of $750,000). This equity can be sourced from various avenues, such as personal savings, proceeds from the sale of an existing property, KiwiSaver, or even gifts from family members.

It’s important to understand that this deposit requirement is distinct from the deposit paid to the vendor during the property transaction process. The lender’s deposit serves as a measure of your financial commitment and reduces the overall risk associated with the mortgage.

The Vendor’s Perspective: Securing the Purchase Agreement

In the realm of property transactions, the term “deposit” takes on a different meaning when dealing with vendors or sellers. When you sign an Agreement for Sale and Purchase, the vendor or their real estate agent will request a deposit, typically ranging from 5% to 10% of the agreed purchase price.

This deposit serves as your commitment to the transaction and acts as a form of security for the vendor. Should you fail to fulfil your obligations under the agreement, the vendor may retain the deposit as compensation.

For example, if you secure a property for $750,000, the vendor might request a deposit of $75,000 (10% of the purchase price) upon signing the agreement. This deposit is separate and distinct from the equity contribution required by your lender.

Negotiating the Vendor’s Deposit

While the standard practice is to pay a 10% deposit to the vendor, it’s important to note that this amount is negotiable. Depending on the circumstances and market conditions, you may be able to negotiate a lower deposit percentage with the vendor.

However, it’s best to ensure that any agreed-upon changes to the deposit amount are explicitly stated in the Agreement for Sale and Purchase before signing. Once the agreement is signed, you are legally bound by its terms, including the deposit amount.

Timing and Payment of the Vendor’s Deposit

The timing and method of payment for the vendor’s deposit can vary depending on the type of sale. In the case of an auction, the deposit is typically due on the auction day itself, so you need to have this ready. For negotiated sales or deadline sales, the deposit is often required when the agreement becomes unconditional or at the time of signing the agreement.

It’s essential to note that the vendor’s deposit cannot be paid directly from your mortgage funds, as the mortgage will not be drawn down until the settlement date. Consequently, you will need to have the deposit amount readily available in your personal savings or through other means, such as KiwiSaver withdrawals or family gifts.

If you plan to use your KiwiSaver funds to cover the deposit, it’s important to inform your solicitor and Mortgage Adviser to ensure that the timeframes for withdrawal align with the deposit condition and settlement date specified in the Agreement for Sale and Purchase. KiwiSaver providers can take up to 15 working days to process withdrawal claims, which could potentially delay the payment of the required deposit.

Temporary Financing Options for the Vendor’s Deposit

In the event that you are unable to secure your KiwiSaver funds in time to pay the deposit, you may need to explore temporary financing options such as a Temporary Overdraft Facility from your bank. This type of loan is specifically designed to cover the deposit amount required by the vendor, allowing you to secure the property while you await the release of your KiwiSaver funds.

Temporary Overdraft Facilities typically have a shorter repayment period, ranging from a few weeks to a few months, and may carry higher interest rates compared to traditional mortgages. However, they provide a convenient solution for meeting the deposit requirement. Setting up a Temporary Overdraft Facility can be complex, so it’s essential to seek guidance from an experienced Mortgage Adviser to help you understand the associated risks and costs.

As you can see, navigating the intricacies of the deposit requirements when purchasing a property can be a lot to get your head around, especially for first homebuyers.

However, by understanding the nuances surrounding the term “deposit” and its implications from both the lender’s and vendor’s perspectives, you can approach your home buying journey with confidence and maximise the chances of a smooth and successful transaction. Feel free to reach out if you need a hand!

Applications for finance are subject to meeting the lenders criteria, terms, and conditions. Refer to our website www.hbmi.co.nz for our Public Disclosure Document.