When purchasing property in New Zealand, you’ll encounter two key terms: the bank deposit and the purchase deposit. While they might sound similar, they serve different roles in the home-buying process. Let’s dive into what each of these deposits means and how they impact your property transaction. The Bank Deposit The bank deposit is not a payment you make directly to the bank. Instead, it’s a requirement that the bank uses to assess how much they’re willing to lend you for the property purchase. Purpose: The bank deposit reflects the amount of savings or equity you have toward the purchase and helps the bank determine your loan eligibility. Typically, banks will require 20% of the property’s value as your deposit to qualify for a home loan, however in some instances this can be less. Example: If you’re purchasing a property worth $500,000, the bank will want to see that you have saved at least $100,000 as a bank deposit (20%). This amount is not paid to the bank, but it demonstrates your financial commitment to the property purchase. The bank deposit is essentially your equity contribution and a key factor in securing your loan. It is assessed as part of your application and can be drawn from your KiwiSaver, savings, gifted funds, or even equity in a property you already own. The Purchase Deposit The purchase deposit is the actual amount you pay to the seller once the Agreement for Sale and Purchase has been confirmed. This deposit is typically 10% of the purchase price and signals your intent to proceed with the purchase. Purpose: The purchase deposit can be paid at different times, but typically payment is made when the Agreement for Sale and Purchase is unconditional. As stated above, this deposit amount is normally 10% of the purchase price, however it can be any amount as agreed with the seller. Example: For a $500,000 property, you might pay a 10% purchase deposit, which equals $50,000. This sum is paid once you have confirmed the Agreement for Sale and Purchase, and is paid using KiwiSaver funds, savings, or gifted funds. What about the balance of my contribution towards the purchase? Your contribution towards the purchase (as assessed in the bank deposit section above), is paid in two lumps. Firstly, towards the Purchase Deposit, then secondly the balance towards settlement. Purchase Deposit Payment: Your purchase deposit is paid when the Agreement for Sale and Purchase has confirmed. Balance Payment: The balance of your contribution towards the purchase is paid to your lawyer on settlement, which is when ownership of the property is officially transferred to you. Key Differences Between the Bank Deposit and Purchase Deposit Bank Deposit Purchase Deposit A requirement from the bank to assess your eligibility for a loan. Typically, 20% of the property value. Demonstrates your equity contribution and financial commitment. Not paid to the bank. Paid to the seller once the contract is confirmed. Typically, 10% of the purchase price. Secures the Agreement with the seller and confirms your intent to buy. Paid when the contract is confirmed. Real-World Scenario Let’s say you’re buying a property for $650,000 in Christchurch: Bank Deposit: The bank requires you to have a 20% deposit in order to lend to you the balance, so you’ll need to show that you have $130,000 to contribute towards the purchase. This can be made up of your KiwiSaver funds, savings, gifted funds, etc. Purchase Deposit: Once you have confirmed the Agreement for Sale and Purchase, you will pay a 10% deposit to the seller to secure your intent to buy, which equals $65,000. Balance: The balance of the purchase price ($650,000 – $65,000 = $585,000), is payable on settlement. This amount will be made up of your loan advance from your bank ($520,000), and the balance of your bank deposit contribution ($65,000). Understanding the difference between a bank deposit and a purchase deposit is crucial when buying property in New Zealand. The bank deposit is an assessment of your financial commitment and is required by the bank to secure a loan, while the purchase deposit is the actual amount you pay to the seller to confirm your intent to buy. If you’re in the process of purchasing property or need assistance with the legal side of things, our team is here to help you navigate every step of the journey. Get in touch with us today!
