Everything you need to know about deposit bonds
Whether you’re buying your first home or expanding your property portfolio, there’s a good chance you’ll find it challenging to free up the cash you need for a 10% deposit. A cash deposit has long been considered a necessary evil for securing a contract of sale, but it’s not the only way.
One alternative is a bank guarantee, which assures the seller of payment in case you fail to settle. The bank offers guarantees on a secured basis, which means that if you don’t have the cash available, you’ll need to take out a personal loan or extend your mortgage. This tends to involve a lot of paperwork that takes time to set up, so they’re less than ideal for short settlement periods.
For longer settlement periods, you’ll generally need to keep the cash amount on deposit with the bank. You’ll earn interest on this deposit, but you won’t be able to invest your money elsewhere, such as in other property or shares. You’ll also generally pay ongoing service fees in addition to the establishment fee, which can rack up over time.
There’s another alternative that every property investor needs to know about: deposit bonds.
Similar to a bank guarantee, a deposit bond is a commitment to pay the deposit amount, which the seller can claim if you fail to settle. But that’s where the similarity ends.
Deposit bonds are fast and easy to apply for and can generally be issued within a few business days. With a deposit bond, you only pay a one-time premium when it’s issued; there are no ongoing service fees. And because you don’t need to pay anything to the seller until the property settlement date, you get more time to save your full deposit amount. Depending upon the project duration, you could get an extra 18–24 months to save, while fixing the total settlement value at today’s prices.
But the biggest advantage of a deposit bond is you won’t need to apply for a new loan or redraw on an existing one to secure it. And your available cash will still be available to invest in any opportunities that arise before settlement.
We know what you’re thinking: these deposit bonds sound too good to be true, so what’s the catch?
Well, some real estate agents and sellers (or their solicitors) will only accept bank guarantees or cash deposits. Sometimes that’s for a legitimate reason, such as the bank the developer is borrowing from for the development does not accept deposit bonds. Other developers may accept deposit bonds, but may limit them as a percentage of the total value of deposits.
It can be quite disheartening after you’ve taken the time to research your ideal property to be stopped in your tracks because the developer won’t accept deposit bonds.
That’s where we can help. We’ve done the hard work of identifying developers who will accept deposit bonds, so you can take advantage of this property pathway. As you search and view the many properties listed on our website, simply look for the “deposit bond approved” in the listing.
When you find the property you’ve been looking for, talk to us for more information on starting your property journey today.
Disclaimer: The information contained in this article is for information purposes only and cannot be relied upon. You should seek professional advice tailored to your specific personal and financial circumstances.