Deposit Bonds: What are they and why use them?

Deposit bonds are a substitute for the cash deposit required when buying property, but who needs them?

If you are looking to buy a new home or land purchase, you will need to put down a deposit (usually ten percent), but what if you don’t have access to the cash at the time of purchase but know that you will later at settlement?

This is often the situation if you are:

  • Buying and selling, with your cash locked up in the equity in your home
  • A first home buyer borrowing 100% using a family guarantee
  • Downsizing – asset rich but cash poor
  • A property owner buying their first investment property

So what is a deposit bond?

A deposit bond (usually up to 10% of the purchase price) is a financial agreement that can be used in place of a cash deposit, when a buyer exchanges contracts on a property. The bond acts as a guarantee to the seller, that the buyer will pay the full deposit on the agreed date. Think of it like an IOU for the deposit amount that you give the vendor and follow up with the full payment upon settlement.

While there are other options available, such as bridging finance or buying ‘subject to sale’, deposit bonds may be a more financially advantageous alternative. Using a deposit bond allows you to leave your savings untouched and earning interest right up until the funds are required for settlement.

When is a deposit bond paid?

Purchase deposits are usually paid when contracts are exchanged, or at auction when your bid is successful (with prior vendor acceptance). It is important to remember that you will still need to repay the deposit bond (plus fees) back to the bond issuer, by the agreed date.

Deposit bond costs

The cost of a deposit bond depends on the property value, the length of time to settlement and the bond provider.

As a general rule, deposit bonds cost approximately 1.2 -1.3% of the purchase price. This is a one-off payment, often partially refunded if the purchase falls through.

Are deposit bonds always accepted?

Some vendors may refuse to accept deposit bonds, especially if they hope to use release of the cash deposit to fund their own purchase. It is best to talk to the agent or person selling the property upfront and state your intention if you wish to use a bond, before signing any deposit bond agreements.

What is the difference between a deposit bond and a bank guarantee?

A bank guarantee is a guarantee from a lender to ensure the liabilities of the debtor will be met. While a bank guarantee and deposit bond are similar, there are some key differences between them:

  • Bank guarantees are secured, which means they require real estate or cash security to release, while deposit bonds are unsecured
  • Bank guarantees usually have a higher setup and ongoing costs than the deposit bond’s one-off fee
  • Bank guarantees need more paperwork while deposit bonds are quicker to obtain

For further information, or to obtain a deposit bond, speak to your broker or financial advisor or visit the Deposit Assure Website.

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