What is a deposit bond?
What is a deposit bond?
If you are struggling to get access to a 10% cash deposit for your property purchase, you’re not alone!
Whether you’re a first home buyer, downsizing or investing, getting the deposit together is one of the major hurdles facing home buyers today.
But more and more Australians are realising there’s a smart alternative to a cash deposit: it is called a deposit bond.
A deposit bond is also known as a deposit guarantee. A deposit bond is used in place of the cash deposit required between signing the contract of sale and settlement.
Think of a deposit bond as an IOU for the deposit amount you need to secure your property.
Just like a cash deposit, a deposit bond guarantees your commitment to an unconditional contract of sale. Then, at settlement, you simply pay the full purchase price, including the deposit amount and any other costs, like stamp duty.
The only money that is exchanging hands is the deposit bond fee, which you pay to the deposit bond provider upfront.
Is a deposit bond an ongoing facility?
There can be confusion that a deposit bond can be used as a deposit to help secure finance from your bank or lender. That’s not the case.
In fact, a deposit bond can only be used as the deposit (up to 10%) to guarantee your commitment to the purchase of real estate or land to the vendor. At the time of settlement the deposit bond ceases to play its role in the transaction and the buyer must replace this deposit bond with a loan or cash at that time.
So why use a deposit bond?
Deposit bonds are a smart option if you want to purchase a property but don’t have ready access to a cash deposit - but you will by the time of settlement. You might be a first home buyer who simply doesn’t have enough cash sitting in the bank for the deposit however you have a security guarantor covering part of your loan. Or you might be downsizing to a smaller property, but because you haven’t yet sold your current home, your deposit is still tied up.
Here are 3 facts you need to know about deposit bonds:
Fact 1: A deposit bond guarantees up to 10% of the purchase price
A deposit bond provider “guarantees” you for the deposit bond amount right up until you get the funds at settlement. In other words, it gives comfort to the vendor that you are committed to the sale. The most important thing is that you always check with the real estate agent, developer or vendor to make sure they will accept a deposit bond instead of a cash deposit.
Fact 2: You pay no interest
This is where a deposit bond becomes really attractive. There’s no interest to pay on deposit bonds – you only pay the one-off fee just before your deposit bond is released. In most cases, this means a deposit bond is more financially advantageous than taking out a personal loan or redrawing to pay your home deposit.
Fact 3: Deposit bonds are very versatile
Deposit bonds can be used for lots of situations:
• To buy a home, vacant land, commercial property and off the plan.
• For settlements of less than six months or more than six months.
• For private treaty sales and auctions.
• Whether or not you currently hold finance approval from a bank or lender. If you don’t, you may still be eligible by assessing your income, assets and liabilities to verify that you will have the funds to settle on your purchase.
To find out more about deposit bonds and work out whether they’re the right option for you, talk to our team by contacting us.
