Deposit Bond
Ready to buy but waiting for funds to arrive? A deposit bond might be just what you need.
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If you’re thinking of buying a property, you’ll need to have a deposit ready. It’s usually around 20% of the purchase price, and you’re expected to hand it over when the contracts are signed. But what if your funds are tied up somewhere else? That’s where a deposit bond can help.
What is a deposit bond?
Deposit bonds are issued by insurers and lenders. They guarantee that the seller will receive the deposit by the settlement date. If you don’t have the funds by then, the insurer will pay the deposit for you, and you’ll need to pay them back in the future.
How does a deposit bond work?
When you apply for the deposit bond, the insurer will conduct credit checks and make sure that you’re good for the money. They will then issue you a bond which you can use to buy a house without a cash deposit.
Upon settlement, you pay the full price of the house, and the deposit bond lapses. If you’re not able to pay or if you renege on the contract, the insurer pays the deposit owed to the seller.
The insurer will then chase you up to reimburse them for the lost deposit and any related administration or recovery fees.
It’s important to note that not all sellers accept deposit bonds, and some may insist on cash. If you’re buying at auction, always check with the realtor before the auction begins if you can use a deposit bond. It will need to be written as an acceptable form of deposit in the contract, and you may want to run it by your lawyer.
When can I use a deposit bond?
Deposit bonds are useful in the following situations:
When you’re switching between properties
When selling one property and buying another, it can be hard to line up the timing of the sales. If you’re still waiting for the settlement on your previous property, you can use a deposit bond to secure your new property.
When your money is invested elsewhere
If your money is tied up in investments that can’t be broken straight away, a deposit bond can help you secure a house while you’re waiting for the invested money to free up.
When you’re waiting for funds to come through
If you’re waiting for a First Home Buyer’s Grant to come through, or for your superannuation fund to release money, or for a transfer from ‘the bank of mum and dad’, you can use a deposit bond in the meantime, so you don’t miss out on your dream home.
When you’re buying at auction
You may not end up getting the first house you bid on. In fact, you may need to attend several auctions, and each time you’ll need to organise a deposit. Rather than moving money around and rearranging your finances each time, a deposit bond can make the process much simpler.
When you buy off the plan
If the builder breaks the contract or goes bust, it can take time to get your deposit back from them. A deposit bond allows you to promise them money but not actually give them any cash so that you’re not out of pocket if the builder reneges.
What’s the fee on a deposit bond?
Generally, the fee is 1.2%-1.3% of the deposit amount. It’s paid upfront when the bond is issued. If your bond is valid for longer than 6 months, the fee is usually higher. You can also get a short-term deposit bond and then extend it, if you need to, by paying an extra fee.
If you don’t end up using it, either because you didn’t buy a house or because you put down a cash deposit at the time of signing, then the insurer may refund some of the deposit bond fees.
How do I apply for a deposit bond?
The approval process for a deposit bond is very similar to that of a home loan. The insurer will require ID and information about your financial situation, including your income, debts and assets, and they will conduct a credit check.
If you are using the equity in an existing property to secure the deposit bond, you’ll need to provide the details. Similarly, if you are expecting funds from the First Home Buyers Grant or your superannuation, you’ll need to provide the supporting documents. The insurer will also ask you if you have been approved for a home loan and the relevant details.
If you have been referred to them by a lender, then they may already have all the information, making the process much quicker and easier. Approval normally takes around 1-2 days, though some insurers can give you the green light within a few hours.
Can I use a guarantor for a deposit bond?
Yes, you can use a guarantor for a deposit bond. The insurer will require the guarantor’s financial information too. They’ll also want details of any properties that the guarantor is using to secure the funds.
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