What is a Deposit Bond and how can it help?
Deposit bonds aren’t that well known but they can be incredibly helpful during property transactions. Today we will take a look at what a deposit bond actually is and when you should consider leveraging its benefits over a traditional cash deposit.
What is a Deposit Bond?
A deposit bond serves as a substitute for the cash deposit, usually 10%, required when purchasing a property. Purchased from an insurance company or financial institution, a deposit bond guarantees that the deposit will be paid in the instance of purchaser default.
This means that purchasers can avoid parting with a cash deposit - which can be substantial in todays market - and hold the funds in their existing investment or redraw accounts until the purchase actually settles.
For sellers, accepting a deposit bond is safe and may open up a wider pool of purchasers, thereby increasing potential sale price.
Why choose a Deposit Bond?
Financial flexibility: opting for a deposit bond eliminates the need to tie up your funds in a cash deposit, allowing you to invest or retain liquidity elsewhere
Property investment: for investors transacting on multiple properties simultaneously, a deposit bond can help with cashflow
Buying at auction: in scenarios when immediate payment is required, such as at auction, a deposit bond can be a convenient option in place of a cheque
Buying off the plan or extended settlement: if your settlement will be longer than the traditional six weeks PLEASE investigate a deposit bond. If your property is scheduled to settle in say nine months time for example, that is nine months that that 10% could be sitting in your existing offset account, saving you potentially significant amounts of interest. Existing clients will know that I’m fanatical about keeping savings in offset as long as possible and I love deposit bonds in this scenario. Even if you don’t have an existing home loan, why not see whether a high interest savings account would be a better use of your funds during this period.
And the risks?
Firstly, you will need to check that the person you are buying from will accept a deposit bond, as it isn’t a given. Your Solicitor/Conveyancer may be able to help with this particular aspect of your negotiation.
Also, you must bear in mind that if you default on the contract and the deposit becomes payable then the company that issued the bond and paid out the deposit will then recover this amount from you. In other words, the bond protects the seller. For the buyer it is simply another tool to help manage cashflow.
Applying for a deposit bond is easy and can be done through your Mortgage Broker. They can be property specific or, if you haven’t found the right place yet, can be issued with a period of three of six months validity and renewed just like a pre-approval. Your broker will help you to choose the best option for your requirements.
In conclusion, next time you find yourself doing the numbers on a potential real estate opportunity, consider whether a deposit bond could be a good tool to help you achieve your goals. As always, please seek advice from a qualified Mortgage Broker to weigh up the costs and benefits of each option.