A deposit bond is effectively an insurance policy that can be used as surety for a 10% deposit on a property you are purchasing. When you can’t or don’t want to raise the deposit as cash.
Examples of when this can be useful include;
· purchasing a property before you have sold another property,
· Purchasing a property and borrowing all of the purchase price and costs, or
· Purchasing off the plan and settlement is 12 months away and you can make better use of that cash in the interim (shares or in an existing offset account).
There are different types of deposit bonds:
· A “finance backed” bond (where you have a finance approval before applying for the bond).
· An “equity backed” bond (where you don’t need a finance approval before applying for the bond – the bond company will then do a high-level home loan check to make sure getting finance won’t be an issue before applying for the bond)
The price of the bond is driven by 2 main factors:
· The period the bond is required for (the longer you require it for the more expensive the bond will be).
· The deposit bond amount (the higher the amount the higher the cost).
For example, a $200,000 bond (10% of $2M) for 3 months settlement period costs ~$2,600. Whereas the same bond amount for 12 months will cost ~$7,000. This usually is the only fee you pay.
You can get a deposit bond for a specific property, or an auction bond (for which the particulars are completed once the property is purchased/located).
Importantly if due to default on the contract by the purchaser, the vendor can claim payment for the deposit bond from the deposit bond provider and their insurer. It is important to understand that using a deposit bond does not indemnify you from paying the deposit if a claim is made on the bond by the vendor. The bond provider will seek payment from you if a claim is made.
I find that some vendors / agents would prefer to avoid deposit bonds on some occasions, so its important to make sure a deposit bond is acceptable before signing the contract for the particular property.
Written by Tom Morison