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Having the cash available for the deposit at exchange contracts, can be a dilemma for some purchasers. Deposit bonds can be a solution.

Having the cash available for the deposit, can be a dilemma for some purchasers. Deposit bonds can be a solution 

Exchanging contracts requires a deposit to “seal the deal”. The deposit is usually around 10% of the purchase price. Once exchange has occurred, then the property is officially under contract until settlement when ownership officially changes. The deposit can be paid in cash but a deposit bond can be used in place of cash.

There are lots of situations where paying a large deposit 6 weeks or more from settlement can be an issue:- 

• First home buyer borrowing 95% of the purchase price and only needing a 5%, but the deposit needed to exchange is 10%,

• The deposit is coming from an equity release or sale of another property, which hasn’t been finalised yet,

• The funds are locked away in an investment which doesn’t mature until closer to settlement of the property, 

• An investment property purchase where an investor is borrowing the entire purchase price and securing it over another property they already have,

• Attending an auction and not knowing if you will be the successful bidder. Allows you at attend a number of auctions without having to transfer deposit funds from one agents trust account to another.

In these situations, deposit bonds can be a welcome solution. Deposit bonds are a guarantee that can be used in place of cash when contracts are exchanged. The deposit bond provider confirms that the borrower has the funds for the purchase or has loan approval conditional on valuation. They then provide a guarantee for the deposit amount and will pay it even if the buyer defaults. 

Deposit bonds have become a popular option for some home buyers as it can speed up the purchase process and allows you to exchange contracts sooner than if you had to transfer the money. It could be the difference between securing the property of your dreams or being gazumped by another buyer who was able to exchange contracts sooner than you. 

However, before you decide to use a deposit bond, you need to have a good understanding of how it works. Firstly, deposit bonds are split into two types: short term and long term. 

Short term deposit bonds: This type of bond lasts for three and six month periods and are ideal for those purchasing at auction. 

Long term deposit bonds: These bonds can last between 12 – 48 months, depending on the insurer. These are usually for properties that haven’t been built yet e.g. off the plan projects. 

It is also important to remember that deposit bonds do not replace the deposit. It is simply a guarantee that the buyer will pay the amount in full at settlement, not that you forgo actually paying the amount. 

Make sure you check with the vendor before making an offer or bidding at auction to ensure they will accept a deposit bond. Then, ensure that the solicitor adds the appropriate clause to the contract to allow deposit bonds to be an acceptable form of payment. 

State Custodians is accredited to arrange deposit bonds for purchasers. If you think that you might need a deposit bond or want further information on whether it is a recommended option for you, give our lending specialists a call on 137262 or email info@statecustodians.com.au.