Understanding “Deposits” in House Purchases: Bank Required Deposit vs Deposit Paid to Vendor
When buying a house, the term “deposit” is commonly used by both banks and also in Agreements for Sale and Purchase. Although it’s the same word, it doesn’t mean the same thing in each context, which can cause confusion for buyers. One is the saved amount of funds that the bank requires a buyer to have before they will grant the buyer a loan for their purchase, and the other is the amount of money that the buyer will pay (from out of their savings) to the vendor under the Agreement for Sale & Purchase when the contract conditions are confirmed. These two types of “deposit” serve different purposes and have separate implications. They can be quite different amounts.
Bank Deposit (Equity in the Property)
The bank deposit refers to the amount of equity the buyer contributes toward the purchase of their home. This is the buyer’s financial stake in the property and is typically a percentage of the total purchase price. For example, in New Zealand, banks often require a buyer to have a deposit of at least 20% of the home’s value for standard lending, although lower deposits may be accepted with specific conditions. This deposit usually comes from a buyer’s savings or Kiwisaver funds or may be from a gift from family.
This deposit reduces the amount the bank needs to lend to the buyer in order for the buyer to complete the purchase and provides a cushion against market fluctuations, ensuring the buyer has a vested interest in maintaining the property. It is worth noting that the higher the deposit amount that the buyer has saved, the less the buyer needs to borrow, potentially resulting in lower loan repayments and better loan terms.
Vendor Deposit (Part of the Purchase Price)
The deposit under the terms of the Agreement for Sale & Purchase is a payment made to the vendor by the buyer. It is part payment of the purchase price in advance. It is typically paid via the real estate agent when the agreement becomes ‘unconditional’— meaning all conditions, such as finance or building inspections, have been met. This deposit is usually a maximum of 10% of the agreed purchase price.
For example, if the purchase price of a property is $800,000, the deposit payable under the Agreement would generally not exceed $80,000. This amount is credited towards the total purchase price at settlement of the purchase. The deposit payment by the buyer to the vendor on confirmation of the contract conditions demonstrates the buyer’s commitment to the transaction.
A buyer should ensure that the deposit amount they agree to pay to the vendor under the Agreement is not more than the saved funds that the buyer has on hand. If a buyer intends using their Kiwisaver funds as their deposit they need to take care as Kiwisaver providers have strict rules around using Kiwisaver funds for a deposit that must be complied with and often require that the deposit be held in the vendor’s lawyers trust account until settlement (rather than being paid to the real estate agent). Additional clauses will need to be added to the contract to cover this situation. You should talk to your lawyer about this before signing an Agreement.
Key Differences
- Purpose: The bank deposit is the buyer’s equity in the property, while the vendor deposit is a partial prepayment of the purchase price.
- Amount: The bank deposit may be larger than the vendor deposit, as it is made up of all of the equity that the buyer has to put towards the purchase price, whereas the vendor deposit is (usually) a maximum amount of 10% of the purchase price paid by the buyer out of those equity funds that the buyer has saved.
- Timing of Payment: The bank deposit amount (i.e. the buyers equity) remains in the buyers possession and is then applied by the buyer to the purchase price. This is usually paid in two parts – first in payment of the deposit to the vendor upon confirmation of the contract conditions and secondly any remainder, together with their bank loan advance, is used to pay the balance of the purchase price for the property on the settlement day.
Understanding the different ways the word ‘deposit’ is used by different people is essential for buyers to manage their finances and meet their obligations to their bank and the vendor.
We recommend that buyers seek legal advice before signing an Agreement to ensure they can comply with all requirements during the home-buying process. If you are buyer looking for assistance, get in touch with our experienced conveyancing team who can help you navigate your purchase with confidence.
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