What is a deposit bond?
A deposit bond is essentially an insurance policy or bank guarantee covering the money needed for a deposit when purchasing a property. In effect, it stands in place of cash at exchange.
Importantly, no money actually changes hands at the time of exchange. Instead, all purchase funds get dealt with at settlement. Once the buyer pays the purchase price in full, the bond lapses.
Why use a deposit bond?
These instruments offer several practical advantages:
- Savings remain intact. This can be extremely useful if you’re waiting on the settlement of your own property to free up cash.
- You can avoid bridging finance. As a result, you sidestep the costs and delays that come with arranging short-term lending.
- You can buy at auction. Using a bond lets you bid without needing to have the full 10% deposit liquid on auction day.
- Flexible terms. Some run for up to four years. Generally, however, providers offer them in three- and six-month terms.
Disadvantages
That said, this option isn’t right for every transaction:
- Vendors are often reluctant to accept them. In particular, this is a problem where the vendor wants an early release of the deposit before settlement.
- They aren’t always recognised as a “true” deposit. As a result, problems can arise if the contract or the vendor’s solicitor takes a strict view.
- Many contracts specifically prohibit them. Consequently, you need to check the contract carefully before signing.
Important things to understand
- You should obtain legal advice before going down this path for your individual circumstances. More information on purchasing a property.
- This kind of arrangement is not designed for the purchaser’s benefit. If the insurer has to pay out under the bond, the insurer will then look to the purchaser to repay those monies. In other words, you remain on the hook for the deposit.
- The purchaser remains solely responsible for the transaction; the insurer takes no responsibility for the conduct of the transaction.
What is the difference between a deposit bond and a 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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