When buying property you need to pay a 5-10% deposit on the day you sign contracts (or the day of the auction). 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.
What is a deposit bond?
This type of finance is 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?
Lenders
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.
IMB also offers a deposit bond product, which it calls a deposit power guarantee. RAMS also offers a deposit bond.
Deposit bond specialists
Note that while many lenders won't issue a deposit bond directly they may help you find one through a smaller company specialising in deposit bonds. You can also enquire directly with these companies.
Here are a few deposit bond specialists:
Deposit Power
Deposit Bond Australia
Insurer QBE also offers deposit bonds.
Risks and benefits of this type of finance
Benefits
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.
Risks
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.
Images: Shutterstock
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Written by
Richard Whitten
Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full profile
I need a short term loan of $500,000 to pay for the property I have contracted to buy but have not yet sold my property, which is worth more than the one I am buying. I see there are deposit bonds and bridging loans available. I do not have a mortgage on my property. What would you suggest?
This really depends on your specific circumstances. It might be best to speak to a mortgage broker about your options.
On our page, you can also check out the list of lenders who offer deposit bonds. Many lenders won’t issue a deposit bond directly but they may help you find one through a smaller company specializing in deposit bonds.
I’m looking for the best provider of a deposit bond to purchase off the plan. Deposit value $78000. Sunset date 3.5 years from contract date. We will be selling our current home in 12 months (so no contract yet). Your site recommend Aussie home loans but they are no longer offering deposit bonds. Can you confirm who else does this.
In the table above, there are also other mortgage brokers who can help you find a deposit bond or home loan apart from Aussie. Meantime, Aussie not only offers their own mortgage products but also connects customers with 20+ lenders so they’re still a useful option if you’re looking for a deposit bond.
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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.
I need a short term loan of $500,000 to pay for the property I have contracted to buy but have not yet sold my property, which is worth more than the one I am buying. I see there are deposit bonds and bridging loans available. I do not have a mortgage on my property. What would you suggest?
Hi Robyn,
This really depends on your specific circumstances. It might be best to speak to a mortgage broker about your options.
On our page, you can also check out the list of lenders who offer deposit bonds. Many lenders won’t issue a deposit bond directly but they may help you find one through a smaller company specializing in deposit bonds.
Thanks,
Richard
I’m looking for the best provider of a deposit bond to purchase off the plan. Deposit value $78000. Sunset date 3.5 years from contract date. We will be selling our current home in 12 months (so no contract yet). Your site recommend Aussie home loans but they are no longer offering deposit bonds. Can you confirm who else does this.
Hi Ann,
Thanks for your inquiry.
In the table above, there are also other mortgage brokers who can help you find a deposit bond or home loan apart from Aussie. Meantime, Aussie not only offers their own mortgage products but also connects customers with 20+ lenders so they’re still a useful option if you’re looking for a deposit bond.
Cheers,
May