The Confusion around “Deposits”!

It is very common for us to be talking to clients who can get confused around the word “deposit”. The reason why this happens is simply because it means different things depending on who they are talking to – so to give a bit of insight into this, I’ve provided some information below.

“Deposit” often will mean something different to an agent, vendor or developer, than it will to the bank, or to a potential purchaser. The key differences are as follows:

If you are talking to an agent or a developer and they are talking about a deposit, often what they are referring to is what you pay to them (into their solicitor’s trust account) upon signing the Sale & Purchase agreement. This can often be 10%, or 5%, or even a nominal figure (e.g. $20k, $30k, $50k, etc.). This is what is required for you to often go ‘unconditional’ on a potential purchase, so in many cases this figure can be set by the vendor or their agent. There are various reasons for this, as they show you are serious about the potential purchase and are willing to provide some ‘hurt money’ if you don’t settle. In addition to this if you’re dealing with a developer, often to meet THEIR funding requirements, the lender who gives them money to complete the development may require pre-sales and those pre-sales require potential purchasers to pay the deposits into a solicitor’s trust account to be able to get the funding approved to get the project off the ground. Whatever deposit you pay on unconditional date or signing date, the balance must be paid on settlement, so for example you may pay 5% deposit on unconditional date, and then you’d pay the other 95% deposit on settlement/completion date.

The above can be very different from what the banks require of you – which is where there’s a miscommunication. Just because the developer tells you they’re happy for a 5% deposit, it doesn’t necessarily mean that a bank will loan you the other 95%! There are a few major things to be aware of in this scenario:

1.      In order to get any loan you’ll need to meet a lenders credit criteria, this not only covers deposit, but also covers servicing criteria and you overall as an applicant.

2.      Most banks at the time of writing will not give loans above 90% LVR unless you fit within the “First Home Loan” scheme by Kainga Ora. There is strict criteria to this which you’d need to meet, so make sure you keep up to date with this link.

3.      If you’re wanting above 80% (anywhere up to 90%) applications can be assessed slightly more harshly, but this is definitely possible for owner occupied buyers. In this scenario you’d get a loan of let’s say 90% from the bank, and you’d provide the remaining 5% deposit on settlement date (with the first 5% being paid when you had originally signed the S&P/went unconditional).

4.      Lastly, for investment property purchasers, you’ll need a 40% deposit if it is an existing property, but the benefit with investment new-builds is that if it fits into this category, you only need a total of 20% deposit, and the banks are happy to lend up to 80% (potentially even 85% in some instances) for investment builds. The same process would occur where you’d have the bank loan (80-85%) on settlement date, the amount you paid on unconditional date (5%) paid already, and the remaining 10-15% funded by you on settlement date.

a.      Be aware that anything above 80% LVR often has low equity fees or a low-equity margin.

For further info on any of the above please feel free to get in touch – [email protected]