For purchasers or investors who have cash tied up elsewhere, or for those who simply do not have readily available access to a cash deposit, a deposit bond may be a convenient and low-cost way of securing property.
Whether you’re a first home buyer, a property investor, or a property owner selling and buying at the same time, a deposit bond offers borrowers a fast, convenient and cost-effective alternative for coming up with a required cash deposit. Just be mindful that the deposit bond may not be refundable if you don’t go ahead with the sale.
Find out how a deposit bond may help you with your next property purchase.
Deposit bonds explained
A deposit bond can be used as an alternative to the cash deposit and can generally provide up to 10% of the purchase price of the property. 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. It’s a guarantee that you’ll pay the money at settlement rather than upfront.
It acts as a substitute for the 10% deposit required between signing contracts and settlement. A deposit bond is advantageous for purchasers who have cash tied up in other investments such as a term deposit or for those waiting on the settlement of a current property.
How can a deposit bond help me?
Coming up with the funds to complete a deposit for a home loan is difficult, and it may be more cost-effective to find an alternative to using your own savings. This is where a deposit bond may be useful.
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. Deposit bonds benefit purchasers who do not have readily available access to a cash deposit or would prefer not to use their own cash.
- 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 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.
What type of property can be purchased with a deposit bond?
- Off-the-plan property
- House and land packages
- Property under construction
- Residential property
- Commercial property
- Registered vacant and unvacant land
Pros and cons of a deposit bond
- Cost savings. The cost savings of using a deposit bond compared to other options (such as bridging finance or short-term loans) is significant. 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.
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.
Speak to a qualified broker and find a loan with a deposit bond for you