When it comes to purchasing a home, whether it be by private sale or auction, a cash deposit is generally required in order to secure the property. However, those unwilling to dip into their pool of savings for a deposit straight away may consider alternative sources such as deposit bonds as a means to secure their dream home.
What is a deposit bond?
Deposit bonds have the ability to act in place of a cash deposit, serving as a guarantee or form of insurance policy when a buyer and seller exchange contracts. This arrangement provides assurance to the seller that the buyer will pay the complete deposit on a specified date, generally at the time of settlement. If the buyer is unable to provide the necessary funds at settlement, the seller can claim the deposit bond from the bond provider.
In most cases, the cost of the deposit bond is simply a fraction of the typical 10% cash deposit that would otherwise be required, making deposit bonds an attractive option for buyers who want to preserve their cash for other purposes including renovations or other property-related costs.
Why use a deposit bond?
While deposit bonds are an alternative for those unwilling to dip into savings or those who do not have a significant deposit readily available, there are a number of broader reasons why Aussies may consider opting for a deposit bond.
Speed of transaction
Deposit bonds can help speed up the process of purchasing a new home, as they eliminate the need for a cash deposit. This means the time and paperwork involved in providing proof of funds is generally not required.
Deposit bonds are typically tailored to specific requirements such as the settlement date, yet can be used to purchase a number of different types of properties including new builds with an extended settlement period. Taking advantage of a deposit bond for new builds or off-the-plan properties has the potential to allow home buyers to take advantage of potential price increases in the property market, which could result in capital gains when the property comes time for settlement.
In terms of costs, deposit bonds are generally cheaper than other borrowing options such as bridging loans, given that you are only required to pay a one-off fee to the issuer of the bond. This has the potential to result in savings of hundreds of dollars compared to recurring interest payments that arise from the likes of a bridging loan.
How do deposit bonds differ from bank guarantees?
Deposit bonds and bank guarantees are both forms of insurance, yet differ significantly in their structure. When purchasing a property, a bank guarantee is an unconditional offer by a bank on behalf of the buyer, to pay the seller an assured amount upon written demand. On the other hand, a deposit bond (as outlined above) allows the property buyer to ‘pay' a deposit without accessing cash from their pool of savings.
Deposit bonds also differ from bank guarantees in the fact that bank guarantees require a form of security, typically either cash or term deposits. On the other hand deposit bonds are not required to have a type of security attached in order to receive the insurance.
Deposit bond pros and cons
Cost-effective: Deposit bonds are a cheaper alternative to other forms of finance such as a bridging loan, potentially freeing up cash that could be used upon settlement.
Flexibility: As outlined above, deposit bonds are flexible as they can be used for a range of property transactions - from fresh new builds to established homes.
Security is not required: Where bank guarantees require a form of security such as cash, term deposits or even real estate, deposit bonds do not.
Deposit-only: As the name suggests, a deposit bond can only be used for the deposit and not the entire purchase price of a property.
Time sensitive: Deposit bonds do have an expiration date and if the transaction does not settle within the specified time frame, the bond will become void.
Relatively unknown: Deposit bonds are a relatively unknown product in the market, with many buyers unaware of the prospect of utilising a deposit bond as a means of a ‘deposit’.
Savings.com.au’s two cents
Despite being an unfamiliar product throughout the home loan landscape, deposit bonds can be a useful tool for buyers who may be unable to, or unwilling to, part with a large chunk of savings for a property deposit. Before considering a deposit bond, it’s essential to ensure you will be able to provide adequate funds by settlement date or you run the risk of losing out on your own slice of the great Australian dream. If you do choose to take advantage of a deposit bond, factors such as the cost, duration, and terms and conditions related to the bond should be accounted for. At the end of the day, a deposit bond can offer flexibility and convenience for both buyers and sellers, making it a viable option for those looking to purchase property.
Image by Towfiqu Barbhuiya via Unsplash