08 Oct The Power of Deposit Bonds
Rather than paying the full 10 per cent deposit you would normally have to produce up front, you hand over a deposit bond, which is a guarantee that the deposit will be paid at a future date. Deposit bonds are underwritten by an insurer to guarantee the vendor that they will be paid their deposit in full at settlement even if the purchaser defaults on the contract of sale.
They are in effect a form of credit because when the time comes to settle, you will still have to produce the balance of the purchase cost, plus the 10 per cent deposit that was covered by the bond. Once issued, deposit bonds can’t be refunded, and if you default you are responsible for paying costs and penalties.
The fee for a deposit bond is usually around 1 per cent of the deposit price, but it’s not money for jam as your finances still have to be approved by a lender to ensure you have the funds available to complete the purchase.
Why use a deposit bond?
If you have the money to buy property but it’s tied up in other investments, then a deposit bond will save you the hassle of accessing those funds until you really need them, for example:
- You’ve just sold your home but the sales funds aren’t yet available for the deposit on your next purchase.
- You plan to attend a number of auctions and don’t want the hassle of arranging a bank cheque each time.
- You are borrowing 100% of the purchase price of a property using equity in another property and you don’t have the cash immediately available to use as a deposit.
- You have your deposit tied up in shares or managed funds and don’t want to liquidate immediately.
- You would prefer your deposit to earn interest before settlement.
- You want to buy off the plan and use the time to keep your money earning interest elsewhere.
How long are they valid for?
Short term bonds are offered for three and six month periods, which are ideal for purchasers buying at auction.
Long term bonds are issued for periods of twelve through to 48 months for projects that are yet to be built.
As your mortgage adviser we would be happy to provide you with more detail on deposit bonds and how they might work to your advantage.