FIRST HOME BUYERS – THE DOWNLOW ON DEPOSITS

The First Home Buyers’ market is heating up once again. We thought we would kick off 2025 by breaking down one of the most common areas of misunderstandings and mistakes we see from our FHB clients: Deposits.

Deposits are a massive source of confusion for First Home Buyers. This is because, unhelpfully, that same word is used to mean two different things. This blog breaks down the differences that you’ll need to know – especially if you are going to use your KiwiSaver.

Bank Deposit vs. Contract Deposit

Bank Deposit:

Usually, the first step on your home buying journey is investigating your finance options – either through a broker or through the bank directly. The sum of money that you can put together for a ‘deposit’ is usually one of the key factors in whether the bank will approve the loan for you. The magic number is 20% – usually the minimum a bank will accept. This money is what the bank considers as your ‘deposit’ for its own lending purposes and can be made up of different sources: cash on hand, KiwiSaver, gifts from family etc.

We refer to this as the bank deposit.

Contract Deposit:

Once you have received your preapproval for finance, it is house hunting time. At this point in time, you generally will have an idea on what your budget is to purchase a home by taking into account how much the Bank has approved for you as a loan and your other cash / gifting and KiwiSaver resources.   The Standard Sale and Purchase Agreement asks for a ‘deposit’, usually payable once all the conditions in the Contract are either confirmed or waived. The standard amount requested for a deposit here is 10% of the Purchase Price, and you must have this cash on hand and ready to pay when due. This is usually payable to the Real Estate Agent in part payment of the full purchase price.

We refer to this as the contract deposit.

There is a crucial distinction that you need to have in your head:

When the bank asks for your ‘deposit’ – they are asking how much of the purchase price will come from you as opposed to the bank.

When the Sale and Purchase Agreement asks for a deposit – they are referring to the down payment you make on the Property once you have an unconditional contract. This needs to be paid immediately when due.

Example:

Jill can put together $100,000. This is made up of:

• $10,000 gift from her parents
• $40,000 cash on hand
• $50,000 KiwiSaver funds

This is Jill’s bank deposit.

$100,000 is 20% of $500,000, so that sum is now Jill’s house buying budget.

A $500,000 home would usually ask for a $50,000 deposit (being 10%). Jill can pay for this using her cash on hand and the gift from her parents.

This is Jill’s contract deposit.

Jill’s KiwiSaver funds are withdrawn later to pay for the balance of the purchase price on Settlement Day, along with her loan from the bank.

Contract Deposit – when do I pay, to whom, and is it refundable?

The standard Sale and Purchase Agreement specifies that the Contract Deposit is payable on signing. This is almost always amended to being payable on confirmation of the contract (which means once all your conditions are satisfied, and everyone is locked in the Purchase.)

Briefly, the standard process is that you (the Purchaser) pay the deposit directly to the Trust account for the Real Estate Agent.

The Real Estate Agent then holds your money for 10 working days. The Agent’s commission and other sale expenses are deducted, and the balance is then transferred to the Vendor’s Solicitor. The Vendor’s Solicitor then either holds the balance of the funds until Settlement Day or transfers it to the Vendor.

As a rule of thumb, the contract deposit is non-refundable, unless the Vendor fails to complete the sale, and is at fault.

I am withdrawing KiwiSaver; do I have to have this recorded in the Sale and Purchase Contract or do anything special?

This is where it is crucial to understand the different meanings of ‘deposit’ when buying your first home.

Your key question: do you need your KiwiSaver to pay the Contract Deposit?

In our above example, Jill had cash resources on hand to immediately pay the Contract Deposit when it was due. Let’s tweak this scenario slightly:

Jill can put together a bank deposit of $100,000. This is made up of:

• $10,000 gift from her parents
• $30,000 cash on hand
• $60,000 KiwiSaver funds

A $500,000 home would usually ask for a $50,000 Contract Deposit. Jill does not have enough cash to pay for this when due and will need to pay with her KiwiSaver funds instead.

This is where we can run into trouble.

Putting aside the fact that most KiwiSaver providers require 10 – 15 working days to process your withdrawal request: You legally cannot use your KiwiSaver to pay the deposit in the usual way (as outlined above). This is because a Solicitor cannot release the KiwiSaver funds (including the Real Estate Agent) before Settlement Day. Instead:

1. We need to add a clause into the Sale and Purchase Agreement, acknowledging that KiwiSaver funds are being used for the Contract Deposit.
2. This clause needs to specify that the Contract Deposit will be paid to the Vendor’s Solicitor, not the Real Estate Agent.
3. The clause needs to be clear that the Contract Deposit will be either be paid once your KiwiSaver provider has released the funds, or the contract goes unconditional, whichever occurs later.
4. The Vendor’s Solicitor must give your Solicitor a legally binding promise that they will not touch your KiwiSaver funds before Settlement Day.

We have signed contracts that have come to us in the past that have needed this KiwiSaver clause, but did not have one. We can usually negotiate its inclusion post-signing with the Vendor’s solicitor, but this is not a given as it can be an issue for the Vendors. For example:

• The Vendor’s may need your contract deposit to pay their own Contract Deposit if they are purchasing a new home.
• The Vendor’s Solicitors may refuse to give the legally binding promise that KiwiSaver requires (some do refuse, due to the liability these promises can place on a law firm).

It is important to make sure that the Real Estate Agent knows about your KiwiSaver circumstances before an offer is submitted and, ideally, seek legal advice to avoid the headache that would be a breach of contract if you fail to get this right.

Final Thoughts

This is a very broad overview of one piece of the home buying puzzle. Every First Home Buyer is different – and every Vendor is different in what they need in a Purchaser. It is important to get things right.

Here at Wakefield’s Lawyers, we are experienced with guiding First Home Buyers through this process.

Please contact us on 04 9780 3600 or email info@wakefieldslaw.com We have a great team of experts that have helped many First Home Buyers.cancan Give us a call today.

• Sam Wood (Senior Solicitor)