Any prospective or successful bidders need to know all the options available to them when it comes to the property sale process. If you’re gearing up to dip your toes into the housing market, it may be worthwhile taking deposit bonds into consideration, as they provide a slew of potential benefits to the savvy buyer.
Deposit bonds offer a time-saving and cost-effective alternative to cash deposits that are required when purchasing a home. You may not want to dip into that golden piggy bank account just yet, or break that fixed term investment you’ve been grinding away at.
We at Homestar Finance recognise the fact that the property market can be painstaking to navigate on your own. So whether you’re someone looking to upgrade on your current humble abode, or a first home buyer, we’re here to answer any questions you may have regarding deposit bonds and how you can leverage them to your advantage.
What is a Deposit Bond?
Normally, a cash deposit is a necessary initial step in purchasing a property or bidding at an auction. However, deposit bonds are an alternative form of guarantee that don’t require an upfront payment of cash.
In Layman’s terms: A deposit bond is an insurance policy that indicates the buyer’s commitment and ability to pay the full deposit amount at the time of settlement.
This means that the buyer is essentially able to delay any cash repayments including the purchasing price and the deposit amount until the settlement date. If the buyer is unable to produce the funds at settlement, then the seller will claim the deposit bond from the bond provider.
Benefits of a Deposit Bond
Deposit bonds provide the buyer with a wealth of benefits, usually allowing for faster transactions, cost savings and more monetary freedom when it comes time to purchase.
Benefits of utilising a deposit bond include but are not limited to:
- Secures your property purchase faster since cash deposits often take time to organise
- Helps avoid any short-term loans such as bridging finance to cover the cost of the deposit
- Valid for both short and long term loans
- Allows you to keep long term investments in place to continue generating income until settlement
- Allows you to keep cash in your savings to earn interest until settlement
- Can be used for auctions and private exchanges (subject to prior vendor approval)
- A deposit guarantee only requires a one-off fee compared to a bank guarantee which usually involves higher set-up fees and ongoing costs
- Turnaround time for a deposit bond application is quick, usually within 24 hrs
Risks of a Deposit Bond
As with any contract of sale, there are indeed some risks associated with deposit bonds.
Here are some of the factors that you should be aware of:
- Some vendors may be reluctant to accept deposit bonds as they are selling the property for the purposes of liquidity, i.e. in order to fund the purchase of an alternate property or a loan repayment
- Certain contract terms may specify that a cash deposit is mandatory
- A real estate agent may refuse deposit bonds since they are typically paid from the deposit and the use of a bond would not allow for the early release of their commission
- The applicant has to go through a financial check to ensure they meet certain financial eligibility criteria, such as the ability to pay the deposit and purchase price, as well as any other costs associated with property purchase
Should I Get a Deposit Bond?
At the end of the day, it really comes down to personal circumstances when determining whether or not a deposit bond would work for you.
Although it is down to the buyer’s discretion, see below for some situational examples where deposit bonds might come in handy.
You’re an investor
You may be someone who has diversified their wealth through high-interest savings, shares, investment properties or high-value collectibles such as art. Whichever it is, when you have money tied up mostly in non-liquid assets it can be tricky or counterintuitive to dip into these assets for the purposes of a deposit. In this case, utilising a deposit bond can help leverage these assets so that they can continue to generate income until the eventual settlement of the purchase.
You’re a first home buyer
Purchasing your first home can feel like an endless barrage, when you have so many outgoing expenses and upfront costs to factor in. Not to mention the stress associated with home loan approval. Luckily, utilising a deposit bond can help alleviate some of the early pressures and upfront costs. If you know that you are able to afford the property and have been pre-approved for a home loan, yet you do not have ready access to the initial 10% deposit, you may be suitable for a deposit bond.
Furthermore, if you are making use of the FHOG (first home owner grant) it’s worth noting that the amount will be paid to you at the time of settlement if you are buying and not building.
In any case, for many first home buyers, deposit bonds can be an ideal way to avoid upfront costs. We understand that the path to your first home isn’t always smooth sailing, so if you need a hand with budgeting, Homestar’s budget planner calculator can help you navigate the minefield towards greener pastures.
You’re an upgrader
You’ve gotten married and had kids. Before you know it, the 2 bedroom apartment in the heart of the city has slowly begun to feel less like a bachelor’s paradise and more like a can of sardines. You want to retreat into a nice lavish 3-bedroom house in quiet Australian suburbia and selling the apartment would provide the funds to do so. Unfortunately, simultaneous settlement can be a nightmare for those looking to move on swiftly from their sale. The apartment has sold, but the funds are not yet available to use for your new home that may disappear off the market any minute. You get the picture.
Am I Eligible to Get a Deposit Bond?
Anyone looking to purchase a residential or commercial property can apply for a deposit bond. Eligible entities can include but are not limited to:
- Australian citizens and permanent residents
- Self-managed super funds
- Registered business entities
You may also be asking yourself “How does the approval process for deposit bonds work?”
When you apply for a deposit bond your eligibility will always be considered on a case-by-case basis, but there are three general rules of thumb when it comes to obtaining approval for a deposit guarantee.
- Does the buyer have a formal approval or at the very least a conditional finance approval?
- Will settlement take longer than 6 months? This may be because you are purchasing off the plan or at an auction. If yes, then the bond issuer will need to conduct an asset and liability assessment.
- Are you currently in the process of selling an existing property? When the incoming funds from a property sale are enough to facilitate the purchase of your new property, you will almost always be eligible for a deposit bond
How to Get a Deposit Bond
Along with these main considerations, it is worth keeping in mind the main documentation you have to provide in order for the bond issuer to approve your application.
In order to properly assess your financial situation issuers may require the following:
- A copy of the contract of sale
- Evidence of sufficient funds such as savings, share certificates, fixed-term deposits, etc.
- Evidence of guaranteed future funds, such as the FHOG
Getting a Deposit Bond When Buying Off the Plan
Buying off the plan means purchasing a property based on building plans and designs prior to the finished product. Naturally, there are some risks when it comes to buying a house that is still under construction or hasn’t even been built yet. However, using a deposit bond can help to alleviate some of the major monetary risks.
As long as the property developer is willing to accept a deposit bond, securing the purchase through this method can provide big money-saving benefits.
Typically, developers will ask for a 10% deposit that is to be held in a legislated trust account and invest this money for development purposes. You are then expected to pay the balance upon completion. By utilising a long-term deposit bond in lieu of a cash deposit, you can make the most of your savings and help with financial pressures in the short term. Moreover, if settlement occurs 6 months prior to the expiry of your bond, you may be eligible for a full pro-rata refund.
Buying off the plan means that the deposit bond will need to be issued until the sunset clause specified within the contract. Long-term deposit bonds can last anywhere up to 4 years, which is usually the same time as the completion of the property.
Frequently Asked Questions About Deposit Bonds
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.