A deposit bond acts as a substitute for the cash deposit required when purchasing a property.
Explanation
Once finance has been approved, a deposit bond can be arranged, and is underwritten by leading insurance companies. It is handed to the vendor at the contract signing stage, and as indicated above, it acts as a substitute for the cash deposit, and up to a maximum of 10% of the total purchase price of the property. They are generally issued with a term of up to 6 months, although they can be issued for a term of up to 36 months for property purchases 'off the plan'.
The guarantee does not remove the obligation of the purchaser to pay the full deposit on settlement, and should the purchaser default on the contract, the vendor can claim the amount stipulated in the deposit guarantee from the insurance company. In turn, the insurance company will then seek to recover this from the defaulting purchaser, plus any costs or expenses it has incurred.
The cost varies, depending on the amount and term being guaranteed. For example, a $35,000 guarantee for 3 months could cost in the region of $580. This cost may well be less than alternative forms of short-term financing of a deposit, such as a mortgage redraw, personal loan or credit card drawing, or alternatively, selling shares at the wrong time or breaking a fixed term investment before it has mature.
We would be delighted to arrange the deposit bond on your behalf, and assure you it will be arranged quickly.
When Would a Purchaser Use a Deposit Bond?
A purchaser can use a guarantee whenever they are buying a house, unit or land - whether by private treaty, auction or off the plan. First home buyers, people moving home, and property investors can all take advantage of them.
Typical uses for purchasers include:
- When the purchaser is buying and selling at the same time. Here, the purchaser's deposit may be 'tied up' as equity in their existing property, and so is difficult to access.
- When a purchaser is borrowing more than 90% of the purchase price and doesn't have the deposit in cash. In other words, the deposit is being borrowed from a lender and won't be available until settlement.
- People buying off the plan with a long settlement period.
- Purchasers who prefer to keep their funds invested elsewhere.
- When attending an auction, the guarantee can be issued beforehand with the property and vendor's particulars left blank. Then, if the bid is successful, the purchaser has been authorised to complete the details on the guarantee.
Why Should a Vendor Accept a Deposit Bond?
Acceptance of the guarantee as a substitute for a cash deposit is entirely at the discretion of the vendor. The reasons why a vendor would accept a deposit bond include:
- The ability to use a deposit guarantee may attract a purchaser who cannot, or who chooses not to, access the full cash deposit at the time of the offer.
- Because the vendor knows that if the purchaser defaults, the deposit will be paid by the insurance company underwriting the deposit bond.
- As an alternative to negotiating a cash deposit less than the usual 10%.
- The purchaser with a deposit guarantee may be more qualified, as the application process for a deposit guarantee normally requires that the purchaser prove that they are able to settle on the property.
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