Deposit bonds explained
Published by MFAA
Buying a property is pricey. Sometimes, even though you’ve found the perfect place, you just can’t afford the deposit, which means both you and the vendor miss out on the sale.
Enter deposit bonds.
What is a deposit bond?
Essentially speaking, a deposit bond, which can be issued for up to 10 per cent of the property purchase price, is insurance that you will come up with the money for the deposit by the time settlement rolls around.
A deposit bond is issued by an insurer for all or part of the deposit. If the purchaser fails to complete the purchase, the vendor can present the bond to the insurer and claim the full amount.
Deposit bonds are available as short-term guarantees, to suit settlement terms of up to six months, or long-term guarantees for settlements of six to 48 months. They are also available as an auction bond, which means you are pre-approved for a home loan and deposit bond for a maximum purchase price.
When to use a deposit bond
Deposit bonds can be used by virtually anyone. The most common examples include first homebuyers whose deposit money is tied up in the form of a government grant, homeowners upgrading to a larger property, investors purchasing additional properties and people purchasing properties off-the-plan.
When it comes to investors, a deposit bond is commonly used when they have funds in non-liquid assets. It provides the flexibility to purchase properties when the opportunity arises, rather than having to wait to find the 10 per cent required.
For off-the-plan purchasers, where developments will only be completed in one to two years, selling their current property will only occur six months prior to settlement. If the money for the deposit is being generated by the sale of their current property, it’s impossible to get access to it at the time of the off-the-plan purchase. A deposit bond helps them through the transaction until it is convenient to sell their current property.
When you can’t use a deposit bond
All parties must consent to the use of a deposit bond. There are three main reasons why it may not be suitable.
First, vendors have the right to refuse a deposit bond. A common reason is that they need access to the deposit in order to pay their own deposit for their new home. Second, real estate agents are generally paid their commission from the deposit. Delaying the payment of the deposit also delays their payment.
Finally, unless prior consent is granted in writing by the vendor, using a deposit bond may breach the contract. This means the purchaser may be liable for extra, unexpected costs.
Speak to your broker
Like anything relating to your mortgage, a broker can help you secure a good deal for your deposit bond. There are a number of options out there and your broker will be able to find the one that suits your individual circumstances.