What is a deposit bond?
A deposit bond is essentially like an insurance policy or bank guarantee for money that is need for a deposit when purchasing a property.
No money actually exchanges hands, and all purchase funds or monies are dealt with at settlement, when the monies are paid in full the deposit bond then lapses.
Why use a deposit bond?
- Savings remain intact, can be extremely useful if you are waiting on the settlement on your own property.
- Expensive time delays and bridging finance can be avoided
- Can enable the purchaser to buy at auction
- Some deposits can be used for up to four (4) years, generally however, they are offered for three and six month periods.
Disadvantages
- Vendors are reluctant to use them especially in situations where the vendor requires ant early release of the deposit
- Deposit bonds are not recongised as a ‘true’ deposit and can cause problems i
f they - A lot of contract will specifically prohibit the use of a deposit bond, so you need to be very careful before singing any contract.
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Important things to understand
- You should obtain legal advice before using a deposit bond for your individual circumstances. More information on Purchasing a property.
- The deposit bond is not designed for the purchaser’s benefit in that, if the deposit bond is required to be paid the insurer will look to the purchaser to pay the monies.
- The purchaser remains solely responsible for the transaction, the insurer takes no responsibility for the conduct of the transaction.
Difference between a deposit bond and bank guarantee?
Both a deposit bond and a bank guarantee serve the same function, that is to provide a guarantee that the liabilities of a debtor will be met.
However, there are some key differences which determine which among these two you should opt for:
| Deposit bonds | Bank guarantees |
| Deposit bonds are unsecured. The eligibility assessment is just to ensure that you have the financial capacity to settle on the purchase. | Bank guarantees are secured and require real estate or cash security to release. |
| They have a one-off deposit bond fee. | They usually have a higher set-up and ongoing costs comparatively. |
| Deposit bond applications are more straightforward. | Bank guarantees require more paperwork. |
| They are faster to obtain. | They are comparatively slower. |
Source: https://www.homeloanexperts.com.au/
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