With many of the recent news items and articles relating to the level of deposit required in order to purchase a property or obtain a top up on your loan, especially in relation to the Reserve Banks new restrictions that took effect on November 1st, we thought it important to take another look at what is actually meant by the deposit, how it differs between banks, solicitors and real estate agents and the importance of knowing the funds that will be available when your purchase is going unconditional.
The definition of the deposit, as it relates to the Reserve Bank’s ruling, is the amount of equity that is provided by the borrower in relation to the value of the property being offered as security. The easiest example of this is Cash savings. E.g. If you are purchasing a home for $360,000 and have $72,000 in savings to pay towards the purchase, then your loan requirement for the balance of $284,000 equates to 80% of the purchase price. However, this deposit can be from a number of sources, such as your own savings account, Kiwisaver contributions, gifting from a relative or equity existing in a property already owned by yourself, or from a co-borrower or guarantor. The level of funds available towards the purchase will obviously determine the size of home loan required, and the higher the deposit you are able to provide, the lower the repayment amount will be on your borrowing .
Lenders and solicitors will both require evidence of the deposit and confirmation that it is going to be available on the date of settlement of the purchase. This is where it is important to make sure that any dates on the Sale and Purchase contract allow time for funds to be made available. If you are receiving a gift from a relative make sure that the funds can be transferred to your own or your solicitors account so that you can make a transfer when the money is required. The same applies if you are accessing funds from a term deposit or savings account that needs time for the clearance of funds. If at all possible any payment dates on the Sale & Purchase contract should be arranged to correspond with the dates that the money will be available, and you need to be aware that there may be fees charged if you remove the funds ahead of a loan maturity date. On a couple of occasions this year we have had clients who have delayed settlement dates to allow for their deposit to be available from term deposits and more frequently, Kiwisaver. On one occasion the purchaser was told by the vendor that they would reduce the sale price for an early settlement, but the penalty to access the required funds would have been higher than the saving to be made, so they were advised to delay the date of purchase.
Confusion often occurs when it comes to signing the Sale & Purchase contract and the deposit required upon the purchase going unconditional is discussed. The unconditional date is the date that the contract becomes final and binding and a down payment of the purchase price is usually required. Recently I had some clients who were using their Kiwisaver funds as the deposit for their purchase. These funds are not available until requested by the solicitor to complete the settlement of the purchase, yet the clients had signed a contract stating that they would pay $20,000 deposit when the purchase became unconditional 4 weeks earlier than they would have the funds. Fortunately, on this occasion, they had some other savings and their solicitor was able to negotiate a reduction in the deposit requirement, but it is important to remember that the figure that you agree to pay when you sign a contract (which is a legal document) is the figure that you will need to come up with. More first home buyers are using Kiwisaver funds for their deposit, so it is important that you communicate to the real estate agent if a lower deposit than the suggested amount is going to be available. Otherwise, you may need to arrange an overdraft facility with your bank to cover the cost of the deposit until such time that your loan, Kiwisaver and Homestart first home buyers subsidy can be accessed.
Your registered mortgage adviser will discuss your deposit options as part of the loan application process and can work alongside your solicitor and the agent to help with any arrangements or changes that need to be made. The last thing that anybody wants is for your purchase of that dream property falling over because of an oversight in how and when your deposit funds are going to be available.
