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Sometimes a purchaser doesn’t have the cash ready to pay a 10% deposit on the purchase of a property.  A deposit bond or guarantee is an alternative to a cash deposit. However, it is important to understand what it is and know its limitations … so read on.

A deposit bond is essentially an insurance policy. It means the insurance company will pay the 10% deposit to the vendor in any of the circumstances where the deposit would be required.  No money actually changes hands with a deposit bond. Instead, all purchase funds are paid at settlement by the purchaser in full, and the deposit bond simply lapses.

Why Use a Deposit Bond?

The most common use of deposit bonds is where:

  • The purchase is off the plan – Long term deposit bonds last up to 4 years. This means you have extra time to save up for your property.
  • The purchaser is waiting funds to come through from another source – including the sale of an existing property. This can be a more affordable alternative to bridging finance.
  • Purchasers intending to bid at auctions – While the deposit bond amount is fixed, the vendor and property details can be left blank for you to complete, should you become the successful bidder at an auction.
  • First home buyers – waiting on a government grant which can’t be accessed until settlement

How do you get a Deposit Bond?

To qualify for a Short Term Deposit Bond of up to 6 months you need to be able to show you have sufficient funds to complete the property purchase at settlement. For example a loan approval, a copy of the contract of sale, savings, a term deposit, share certificates, evidence of equity in an existing property, evidence of other funds that will assist in the purchase including a First Home Owners Grant.

How do you get a Deposit Bond?

If you’re buying a property for $500,000 and need a 10% deposit of $50,000, it will cost you around $650 for a deposit bond. If you’re purchasing a property for $1m and need a 10% deposit, it will cost you approximately $1300.  For private treaty purchases, you can also negotiate a 5% deposit with the vendor which would essentially halve the cost of the deposit bond.  For auction however this may not be possible.

Be Aware of the Restrictions

Some vendors may refuse to accept a deposit bond, especially when they are requesting early release of the deposit and need access to it in order to secure a new home.  Prior consent needs to be obtained from the vendor, real estate agent or developer in writing to ensure you can use a deposit bond for your purchase.

The Home Loan Company can put your Deposit Bond in place for you.

 

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