Find out how a deposit bond may help you with your next property purchase.
Deposit bonds explained
When buying property you need to pay a 5-10% deposit on the day you sign contracts (or the day of the auction). And you usually need to have this money ready on the day.
But if you can't access the cash you need for a deposit then a deposit bond can cover you temporarily. A deposit bond is a guarantee that you will pay the cash at settlement rather than up front. It's a substitute for the 10% deposit required between signing contracts and settlement. You can use it when exchanging contracts or bidding at auction.
Banks offer deposit bonds but an insurance company actually issues the bond.
The deposit bond functions in a similar way to a bank guarantee, where the bond provider (or insurance company) agrees to pay the deposit to the vendor in the event that the purchaser does not complete the sale.
Just be mindful that the deposit bond may not be refundable if you don't go ahead with the sale.
How much does a deposit bond cost?
The cost of a deposit bond is determined by the property value and the amount of time until settlement.
As a rule of thumb, you will pay approximately 1.2-1.3% of the purchase price as an ad hoc fee. To demonstrate, if you were buying a property for $830,000 and needed a 10% deposit of $83,000, it would cost you around $1,079 for a deposit bond with a 6-month term.
These bonds can be issued in the short term (up to six months) or long term. The longer the term, the more you have to pay.
Who is a deposit bond suitable for?
A deposit bond is suitable for the purchaser who is "asset rich but cash poor". It may be useful for existing property owners who wish to purchase another property, investors who wish to diversify their portfolio, and first home buyers who do not have enough genuine savings for the deposit.
- Property owners. A deposit bond can be helpful for those who are selling and buying at the same time and whose equity is tied up in existing property.
- First home buyers. If you’re a first home buyer, you may not be in a position to provide the deposit upfront until you receive a government grant or gift from a family member.
- Auction buyers. If you’re planning on buying at auction, you may prefer the convenience of not having to budget for the deposit for each auction that you attend.
- Off-the-plan buyers. A deposit bond may be useful if you’re buying off-the-plan because it means you can avoid having to come up with cash deposit funds until settlement.
- Investors. A deposit bond is ideal for property investors who are looking to defer payment of the cash deposit until settlement. If you don’t want to tie up your cash before settlement so you can keep earning a better return elsewhere, a deposit bond may be a convenient option.
A deposit bond can be a good alternative to a bridging loan.
Who offers deposit bonds?
Some lenders offer deposit bonds, though only one of the Big Four banks does.
- Westpac offers its Deposit Protect Bond with a 6-month short term guarantee.
- ANZ does not offer deposit bonds.
- NAB does not offer deposit bonds.
- The Commonwealth Bank does not offer deposit bonds.
St.George, owned by Westpac, also offers a deposit bond, as does IMB.
Note that while many lenders won't issue a deposit bond directly they may help you find one through a smaller company.
Risks and benefits of this type of finance
- Cost savings. Deposit bonds can be relatively cheap. For instance, if you applied for a three-month deposit bond of $30,000, you would incur a fee of around $300. On the other hand, bridging finance would cost around $900-$1,000. In this example, a deposit bond would save you around $600.
- Convenience. A deposit bond provides a fast and convenient way of accessing a deposit without having to organise alternative options such as bridging finance or an equity release from existing property.
- Long settlement periods. Deposit bonds are normally available between 6 months and as long as 48 months, which may suit you if you’re buying property off-the-plan or vacant land with extended settlement periods.
- Inflexible. Vendors that want an early release of the deposit may be reluctant to accept a deposit bond, which may deem the bond irrelevant.
- Contract of sale. Most contracts for sale must include the relevant clauses that enable the deposit bond to replace a cash deposit for the property. It is therefore essential that you consult a legal professional to ensure that the paperwork is correct.
Susannah opts for a deposit bond
Susannah has decided to buy a property off-the-plan at a purchase price of $640,000 in Terrigal, NSW. Susannah is a first home buyer and doesn’t have the required 10% cash deposit for the maximum guarantee amount of $64,000, so she approaches her bank to see whether a deposit bond would be a good option.
With a required settlement term of 36 months, Susannah's bank manager estimates that the deposit guarantee fee will be $6,240, which is favourable compared to other options such as bridging finance or a personal loan.
After working out the cost savings comparison between a deposit bond and these alternative forms of finance, Susannah decides to consult both a mortgage broker and a solicitor to help prepare the deposit bond and contract of sale for her purchase.
A qualified broker can help you find a deposit bond with your mortgage