What Is a Deposit Bond and How Does It Work?
A deposit bond lets you exchange contracts without handing over a cash deposit. Here’s how it works, what it costs, and when it makes sense.
If you’re buying a home but your cash is tied up until settlement, a deposit bond can stand in for the cash deposit you’d otherwise need at exchange. Here’s how they work, what they cost, and the risks worth understanding before you use one.
At a glance
- A deposit bond is a guarantee that stands in for a cash deposit at exchange of contracts.
- It typically costs 1.2% to 1.5% of the deposit amount, paid once and generally non-refundable.
- You still need to pay the full deposit at settlement, the bond just defers when it’s due.
What is a deposit bond?
A deposit bond (usually covering up to 10% of the purchase price) is a guarantee you give the vendor in place of a cash deposit when you exchange contracts. It’s an assurance from the bond issuer, typically an insurer or financial institution, that the full deposit will be paid by an agreed date. You still owe that deposit, the bond just lets you defer paying it in cash until settlement.
Why use one instead of a cash deposit?
Deposit bonds suit buyers whose cash isn’t accessible right when contracts exchange, including if you’re:
- Buying and selling at the same time, with your cash tied up in your current home’s equity.
- A first home buyer borrowing 100% with a family guarantee.
- Downsizing, and asset rich but cash poor until your existing property settles.
- Buying an investment property while your savings stay invested and earning until they’re actually needed.
How does a deposit bond work?
Application
- You apply to a bond provider (usually an insurer or financial institution), which assesses your financial capacity to complete the purchase at settlement.
Approval and issue
- Once approved, the issuer provides the bond to the vendor as their guarantee. You pay a one-off premium for it, a percentage of the bond’s value.
Settlement
- On settlement day you pay the full purchase price, including the deposit, in cash. The bond itself isn’t part of that payment, it only guarantees the seller gets paid if you don’t complete.
Expiry
- Once settlement is complete, the bond simply expires. If the sale goes ahead as planned, it’s never called on.
How much does a deposit bond cost?
| Typical premium | 1.2% – 1.5% of the deposit |
The exact fee depends on the property value, time to settlement, your financial position and the issuer. It’s a one-off cost, usually non-refundable if the purchase falls through, so it’s worth comparing it against alternatives like a short-term loan.
A deposit bond isn’t a way to avoid the deposit, it’s a way to defer when you actually pay it.
What are the risks?
- You still owe the deposit. If you can’t complete the purchase, you remain legally obligated to pay it, and the issuer will seek reimbursement from you after paying the vendor.
- Not every vendor accepts them. Check with the agent before you commit to using one.
- Market risk. If prices fall before settlement and you decide not to proceed, you still owe the deposit regardless.
- Cost. The premium is generally non-refundable, even if the purchase doesn’t go ahead.
- Fixed validity period. If settlement is delayed past the bond’s expiry, you may need to arrange an extension or a new bond. See what happens if settlement is delayed.
Deposit bond vs bank guarantee
Both guarantee the deposit, but a bank guarantee is secured against real estate or cash, usually costs more to set up and needs more paperwork. A deposit bond is unsecured, has a single one-off fee, and is quicker to arrange.
How do you get a deposit bond?
Deposit bonds are generally issued by insurance companies, sometimes offered through banks and financial institutions. Speak to your mortgage broker or financial adviser, and compare providers as well as alternatives before deciding one is right for you.
Whichever way you fund your deposit, we make sure exchange goes smoothly and everything is in order for settlement.
Ready to exchange on your next property?
Talk to us about your deposit options and get an instant quote for your purchase.
Deposit bond premium range sourced from Canstar. This is general information only and not financial advice, speak to a licensed broker or financial adviser about your own situation.
