Deposit Bonds

 

What is a Deposit Bond?

Typically when you purchase residential or commercial property a 10% cash deposit is payable to the vendor in order to exchange on the Contract of Sale.

A deposit bond is a guarantee to the vendor that the 10% cash deposit will be paid on settlement and enables the purchaser to delay paying the deposit. It also buys
them time to settle on another property or convert assets to cash.

There is a nominal fee that is paid upfront to secure a Deposit Bond for the required deposit. 100% of the purchase price is then paid on settlement.

How does a Deposit Bond work?

Deposit Bonds are underwritten by specialist insurance companies (“the guarantors”) and provides a guarantee to the vendor that the 10% deposit will be paid on
settlement.

If the purchaser fails to pay the required 10% cash deposit the vendor can claim the guaranteed amount from the underwritten insurer.

The insurer will then seek recovery of the deposit amount plus costs from the purchaser.

What are the benefits of a Deposit Bond?

The key benefits for using a Deposit Bond are:

  • Deposit Bonds are quick and easy to organise.
  • Funds that would normally be used as a 10% cash deposit can continue to be invested or used for other purposes.
  • If you a buying and selling another property you may not have 10% cash deposit available.
  • Deposit Bonds can be issued prior to Auctions meaning you won’t have to organise a 10% cash deposit in a hurry.


Are vendors willing to accept Deposit Bonds?

A Deposit Bond is a guarantee that the cash deposit will be paid on settlement. Deposit Bonds are legal and available throughout all states and territories in
Australia and are a common practice.

There should be no reason why a vendor wouldn’t accept a Deposit Bond instead of the normal cash deposit. It is however at the discretion of the vendor if they accept the Deposit Bond in lieu of a cash deposit.

A vendor is often keen to obtain a Contract of Sale on their property and secure a deposit commitment from the purchaser which the Deposit Bond will provide.

Most “Standard” Contracts of Sale stipulates for a cash deposit to be paid. It is therefore recommended that as part of negotiations you specify that the deposit will be made via a Deposit Bond and a special condition can be inserted into the Contract of Sale.

How long is a Deposit Bond valid for?

There are 2 types of guarantees available depending on how long the settlement period is:

Short Term Guarantees – For settlement terms up to 6 months. Purchasers need to be able to
provide evidence that there will be sufficient funds available to complete the
purchase.

Long Term Guarantees – For settlement terms between 6 months and 48 months (4 years). Purchasers need to own other real estate and be able to demonstrate the ability to complete the purchase.

How much does a Deposit Bond cost?

A Deposit Bond will cost you approximately 1.2% of the guaranteed amount.

  • A Deposit Bond of $30,000 to purchase a $300,000 property would cost approximately $360.

Your Finance Specialist will be able to organise a quote for you.

When does the Deposit Bond terminate?

The Deposit Bond terminates when:

  • The Contract of Sale is completed.
  • The Contract of Sale is terminated.
  • The Contract of Sale is rescinded.
  • The expiry date on the guarantee is reached.
  • A claim is paid by the insurer to the vendor.


How do I apply for a Deposit Bond?

To apply for a Deposit Bond we will assist you to complete an application form and provide evidence that you will have sufficient funds to complete the purchase at settlement.

Required documentation includes:

  • Deposit Bond application form
  • A loan approval
  • A copy of the Contract of Sale for the property being purchased


Evidence required to show you will have sufficient funds to complete may include:

  • Bank Statements showing savings
  • Term Deposit Bank Statement
  • Share Certificate
  • Contract of Sale for another property


How can I find further information?

Speak to your Finance Specialist who will be able to provide you with further information regarding Deposit Bonds.