Did you know there are two types of “deposit” when buying a house?

18 July, 2022 | Fiona Taylor

Confusion can arise over the over-use of the word deposit – there are generally two “deposits” when purchasing property. There is the “bank deposit” and the “purchase deposit”.

Your broker or bank asks you “how much do you have for a deposit” when you want to borrow money (get a mortgage) to buy a home – the real estate agent asks you “how much deposit can you pay” when you’re signing an Agreement for Sale and Purchase to buy that home.

The same word but two different meanings.

The Bank Deposit

The broker/bank use of the word deposit relates to the amount of money you are contributing to the purchase of the property (the percentage NOT being paid by the bank).

Typically, this is 10-20% of the purchase price, but can be higher for investment properties or bare land.

For example, if you were purchasing a property worth $700,000 and the bank required a 20% “bank deposit” – this would represent $140,000 in funds that you would have to provide.

This “bank deposit” could be made up of your personal savings, KiwiSaver withdrawals, First Home Grants and/or gifts from family.

The Purchase Deposit

The purchase deposit is an amount of money paid to the vendor of the property to secure your offer to purchase.

The standard amount for the purchase deposit is 10% of the purchase price, but this can sometimes be negotiated with the purchaser to be lower. For example, if you were purchasing a house for $950,000 you would need to pay $95,000 to the Real Estate agent to secure your agreement. This money is then deducted from the final amount you pay upon settlement of the property.

You can negotiate for the deposit paid to be lower as part of your deal, but this negotiation must be agreed before you sign any documentation, and the new deposit amount must be written into the contract.

When is the “purchase deposit” paid?

When this money has to be paid depends on the type of sale.

Purchase by Auction: the deposit is paid on auction day.

Purchase by negotiation or by deadline sale: usually when the agreement goes unconditional but may be required at the time of signing the agreement.

Where does this money come from? Paying the purchase deposit

As this money is paid out before settlement it cannot be paid by your mortgage as this will not be drawn down yet.

Generally, this deposit will have to be paid out of your own savings.

You can either use KiwiSaver Withdrawal or First Home Grant to pay this amount IF the vendor agrees that their solicitor will hold the funds in their solicitor’s trust account until settlement day. (Normally these funds are paid out to pay the real estate agent’s fees and for the vendor to use as a deposit) The agreement will need to be amended to reflect this change.

If the vendor will not agree to the purchase deposit to be held in their solicitor’s trust account, then the purchaser will need to speak to their bank to arrange a temporary facility.

Understanding the home buying process, the deposit you need to pay and when to pay it can be confusing, but that’s exactly why we’re here – to help guide you! If you’re looking to buy a house and need some guidance throughout this process, contact Property Law Specialist, Fiona Taylor on 09 837 6845 or email Fiona.Taylor@smithpartners.co.nz.