What is a deposit bond? Does that mean I don't have to have a deposit?!
One of the most frequently asked questions about deposits - if I use a bond, does that mean I don't have to have a deposit at all?
The answer is, it means you don't have to have a deposit now, (to meet your contract terms) but you do have to have it by the time you settle (own, purchase, get the keys) on the property - and the deposit is likely coming from equity or a guarantee rather than cash savings.
A deposit bond is like a promise, or and "I owe you" to pay the deposit at settlement.
So who uses a deposit bond and why? Here are some examples:
First home buyers using an equity guarantee where they are borrowing most of the purchase price (in effect with the guarantee they don't "have to have" a deposit - who says you have to have 20%, boulder-dash!)
Upgraders who are selling and buying, they won't necessarily have the cash from their sale in time to pay the deposit on the purchase.
Investors who are using equity in their home to fund their investment purchase.
People with a juicy term deposit or money tied up some other way such that they can't or don't want to access it just yet
People buying off the plan without the cash to sit aside for the deposit - remember buying off the plan is it's own whole other mindfield.
SO the answer: do you have to have a deposit - no, not if you have a guarantee or equity elsewhere and the bond will act as a promise note to the vendor (seller) of the property to allow you to buy and pay the deposit at settlement.
There are a few providers of bonds in Australia, all are backed by insurance companies and treated like insurance policies by the vendor - but you should treat them like cash, because when you hand them over you are effectively committing to handing over that much cash at a future date, and if for any reason you do not, they will chase you for it.
They're typically issued when you have some kind of finance approval or assessment in place and are either regular "short term bonds" for properties settling within 6 months which are relatively inexpensive - or "long term bonds" which are much more expensive and involve more of an approval process by the provider. Bonds are fairly regularly accepted but if your vendor won't accept a bond there is the alternative to offer a smaller cash deposit (if you're able). Ideally you would want to know as soon as possible if there will be an issue with accepting your bond or reduced cash deposit so let the solicitor/conveyancer know to check the contract (sometimes it specifically prohibits bonds, rarely - but it happens) and / or run it past the solicitor for the other side.
As a broker we have access to a choice of bond providers. Deposit Assure are one of these and they have provided this clever little explanation for us:
And if that isn't enough... how about Deposit Bond frequently asked questions?!
10 Most Common Questions About Deposit Bonds Answered
So, you’re thinking about getting a deposit bond?
Whether you’re a first home buyer, seasoned property investor, downsizing or buying off the plan, chances are you have a few questions.
Don’t worry – we’ve got the answers you need.
Here are the 10 most common deposit bond questions answered:
#1. When do I pay back the deposit?
You actually never “pay back the deposit” unless there is a claim. The role of a deposit bond is to “guarantee” you for the deposit amount right up until you get the funds at settlement. In other words, a deposit bond tells the vendor that you’re good for the money.
Then, at settlement, you pay the full purchase price plus the deposit and any additional costs, like stamp duty. The only money that is exchanging hands is the deposit bond fee, which you pay to the provider up-front.
#2. How much does a deposit bond cost?
It depends on the deposit bond amount and the required length of time. Talk to our team for a quote.
#3. Do I pay interest?
No – you only pay the one-off fee just before your deposit bond is released. That’s the brilliant thing about a deposit bond. To get an instant quote for your deposit bond please click here.
#4. I am buying off the plan – how long does the deposit bond need to be made out for?
In most cases, buying off the plan means the deposit bond needs to be issued up to the “sunset clause” date. The sunset clause date is a provision in off-the-plan contracts that allows either the vendor or the purchaser to rescind the contract if the title to the property has not been created by a specific date.
Find the sunset clause date in your contract of sale or ask our team to help. While you’re there, look out for a separate clause in your contract relating to deposit bonds – some vendors may request to add additional time on a deposit bond.
If you can prove that settlement occurred earlier than 6 months from the expiry date of the deposit bond, a pro rata refund can be obtained. The maximum refund applicable is 18 months. Terms and Conditions do apply – refer to your deposit bond application or bond provider’s website, or ask our team for help.
#5. Do I need to seek approval from the vendor to use a deposit bond to secure my purchase?
Definitely. Always check with the real estate agent or directly with the vendor to make sure they will accept a deposit bond instead of a cash deposit.
#6. What are the differences between a deposit bond and a bank guarantee?
The idea is basically the same: a bank guarantee is a guarantee from a lending institution ensuring the liabilities of a debtor will be met. So, if the debtor fails to settle a debt, the bank covers it.
But there are some important differences that might impact which you choose for your situation:
Bank guarantees are secured – they require real estate or cash security to release.Deposit bonds are unsecured – the eligibility assessment is just to ensure you have the financial capacity to settle on your purchase, and the Underwriter provides the security and assurance that the deposit will be honoured in the event of a claim.Bank guarantees usually have higher set-up and ongoing costs compared to the one-off deposit bond fee.Bank guarantees require more paperwork for set-up compared to the deposit bond application.Deposit bonds are usually faster to obtain than a bank guarantee.
#7. How quickly can a deposit bond be issued?
Much faster than you think. Within 15 minutes, we can help you get preapproval. Within one business hour, we can have your application form ready for e-signing. And, once you return your signed application with the bond fee payment, your deposit bond can be ready in less than one business hour!
#8. Am I eligible for a deposit bond?
Each scenario is different, but you are typically eligible if:
You hold formal finance approval, OR
You have at least got conditional finance approval that is subject to valuation only, OR
You are selling a property and funds from the sale are enough to purchase your new property outright.
If none of these apply, or when a property settles over six months, your deposit bond provider will need to conduct an asset, income and liability assessment. To be eligible, you or your guarantor will need to own a property with some equity.
The best way to check if you are eligible is to talk to our team.
#9. I am a first home buyer; can I get a deposit bond?
If you already have formal approval for your finance through a family guarantor loan, and your property settles within six months, you can typically obtain a deposit bond. The good news is there’s no need for your guarantor to also sign your deposit bond.
If settlement is more than six months or you don’t have finance approval, your guarantor will need to apply with you for your deposit bond. Your or your guarantor will need to have a property with the equity to release a deposit bond. This is to ensure the guarantor can pay back the deposit bond amount in the unlikely event of a claim on your bond.
#10. How do I obtain a deposit bond?
Obtaining a deposit bond is easy. Simply talk to our team. We will work with the deposit bond provider on your behalf, so you don’t need to add another thing to your list.
The supporting documents you need will depend on your application type, so we’ll tell you exactly what you need to provide. Then, when the application is ready, we’ll send it to you for electronic signing. It’s as easy as that!
Have you got some questions we haven’t answered here? Talk to our team.