Deposit bonds explained

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% 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 6 months, or long term guarantees for settlements of 6 to 48 months.

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% required. 

For off-the-plan purchasers, where developments will only be completed in one to two years, selling their current property will only occur 6 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 commission 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 Mortgage Broker

Like anything relating to your mortgage, your trusted Mortgage Broker can help you secure a good deal for your deposit bond. There are a number of options out there and your Mortgage Broker will be able to find the one that suits your individual circumstances.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.