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This newsletter provides a clear guide on how to assist clients in using their KiwiSaver funds for the initial deposit on a property purchase. It outlines strategies to structure the transaction so it is both legally sound and financially secure, even when navigating the KiwiSaver withdrawal timeline.
What You’ll Learn in This Newsletter:
- Step-by-Step Strategies: How to align deposit payments with the KiwiSaver withdrawal timeline.
- Commitment Safeguards: Techniques to protect the Purchaser’s commitment to the Vendor while waiting for KiwiSaver funds.
- Special Clauses: How to use special clauses to enhance legal and financial security during the purchase.
What’s Not Covered:
- Detailed KiwiSaver withdrawal procedures.
- Alternative funding methods other than KiwiSaver.
- Legal implications for non-first-home buyers using KiwiSaver.
PROBLEM: Understanding the KiwiSaver Catch-22 for Deposits
1. Common Practice: It’s standard for first-home buyers to use KiwiSaver funds for their deposit.
2. The Catch-22:
- You need a signed and dated purchase agreement to initiate a KiwiSaver withdrawal.
- You need to pay money to the seller when you either sign the agreement or satisfy your conditions. If your KiwiSaver funds do not arrive in time, then we have a problem.
3. Timing of Withdrawals:
- For anyone who has always lived in New Zealand, it can take up to 10 working days.
- If contributions were made while living overseas, the process can take up to 15 working days.
RISK: Why Timing is Critical for First-Time Buyers
For many first-home buyers, their KiwiSaver funds are needed for the initial deposit, usually 10% of the purchase price. However, most agreements conditions are only valid for 10 working days. This poses a significant risk—if the deposit isn’t paid on time, the Vendor may cancel the agreement, jeopardizing the purchase*.
*Under a standard ADLS agreement, if the Vendor wants to cancel the agreement for non-payment of the deposit, the Vendor must give three working days' notice. At an auction, you needto pay the deposit immediately.
CONTEXT: Risks of Not Using Special Further Terms in the Agreement
- Risk of Vendor Cancellation: If the deposit funds are not available, the Vendor has the right to cancel the agreement.
- Agent Commission Risk: Without forward planning, the real estate agent might take their commission from the KiwiSaver funds. If the agreement is later cancelled due to reasons like a sunset clause or default, recovering these funds can be challenging.
- Vendor Reluctance: The Vendor may be unwilling to enter into an agreement if no cash deposit is provided when the agreement becomes unconditional.
SOLUTION: Structuring Deposit Payments to Minimise Risk
To protect our clients, we can structure the agreement to accommodate their KiwiSaver withdrawal process while keeping the Purchaser’s commitment to the Vendor intact. This involves two key steps:
1. Initial Deposit When Agreement Goes Conditional:
Further Terms - Initial Deposit
- Suggest an initial deposit amount based on the Purchaser's available savings, such as $10,000, $15,000, or $30,000, etc. This is payable when the agreement becomes unconditional, showing the Purchaser's commitment to the Vendor. This keeps the Vendor happy.
Example Below
- $[insert amount] to be paid to [insert real estate agent’s trust account] upon agreement going unconditional and the remainder to be paid in accordance with clause [insert below].
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2. Further Terms for Deposit Payment:
- Once the agreement is unconditional, the initial deposit is paid to the Real Estate Agent’s Trust account. The remaining deposit is structured as follows:
Further Term - KiwiSaver for Initial Deposit and Held Until Settlement Day
- Use the remaining money from KiwiSaver to pay the remainder of the initial 10% deposit.
Example Below
- Following the payment of the Initial Deposit, the residual amount of the 10% of the purchase price will be payable within one working day following receipt of both the Purchaser's KiwiSaver funds into their solicitor's trust account.
- The deposit will be payable into the Vendor's solicitor's trust account and held until settlement day or until the Vendor's Solicitor has provided settlement undertakings to the Purchaser's Solicitor.
Why This Works: Key Benefits
1. Extended Withdrawal Time:
- This structure allows the Purchaser additional time to complete their KiwiSaver withdrawal, reducing pressure post-agreement.
2. Commitment Assurance:
- The initial deposit underscores the Purchaser’s seriousness, offering the Vendor confidence without needing the full deposit upfront.
3. Fund Protection:
- Holding the deposit in the Vendor’s Solicitor’s Trust account until settlement ensures KiwiSaver funds are secure. If the agreement falls through or the Vendor defaults, the funds can be returned to KiwiSaver without deductions, such as Real Estate Agent’s commission.
Bonus: Applying This Strategy in Auction Agreements
This clause can be adapted as a variation in auction agreements, offering flexibility in various purchasing scenarios.
KiwiSaver Withdrawal Checklist: Are You Ready?
Here’s a KiwiSaver checklist to ensure all steps are completed before making a withdrawal.
TL; DR - Using KiwiSaver for an Initial Property Deposit
1. The Catch-22 / Risk: You need a signed agreement to start your KiwiSaver withdrawal, however the KiwiSaver withdrawal can take up to 15 working days, while standard agreement conditions are only valid for 10 days. This could risk losing the deal if the deposit isn't paid on time.
2. The Solution: Pay an initial deposit from savings when the agreement goes conditional.
3. Template: Use our template How to submit an offer conditional on 10 working days of due diligence
