BANK VS PURCHASE DEPOSIT

The word ‘deposit’ used in the context of purchasing property often has two different meanings.

A bank will require you to fund part of the purchase price (usually 20% or more) from your own savings, First Home Grants, KiwiSaver withdrawals, gifts from family etc. The bank may refer to this as your deposit. But this is not the same meaning as ‘your deposit’ when an agent uses that phrase.

An agent will ask how much deposit you wish to offer the Vendors. The most common deposit is a sum of 10% of the purchase price. This deposit can sometimes be negotiated by the

Purchasers to a lower sum. Any such negotiations should occur prior to the signature of the contract so that the amount of deposit offered to the Vendors is not more than the cash you have available at that time to be able to pay.

The deposit is paid before settlement, and usually, you can’t borrow the money from the bank to pay it (both because the bank expects you to have 20% of the purchase price available from other sources and because the bank won’t have a mortgage over the property until after settlement).

As a purchaser of property, you are often an unsecured creditor, and the deposit you pay to the vendor could be at risk. We recommend caution to purchasers offering to pay a vendor a deposit of greater than 10% of the purchase price. If there is a reasonable period of time between confirmation of any conditions in the contract and the settlement date, the deposit will often be released to the vendors. There may be a risk that they could spend the deposit monies and be unable to repay their existing bank debt and therefore unable to complete settlement, despite being legally obliged to do so.

Kate Warren, Tavendale and Partners, Senior Associate.