What is a deposit bond and why would you want one?

BUYING

By Simone Date-Chong

28-05-2018
Anything that makes the home buying process easier is welcome to first home buyers and a deposit bond can certainly take some of the stress out of the process. But what is a deposit bond and why would you use one? A deposit bond substitutes a cash deposit by providing assurance to the vendor and real estate agent that the deposit can and will be paid at settlement, rather than when the contracts are exchanged.

When buying your first home every dollar counts, so this is where a deposit bond can be particularly useful. The exchange of the deposit bond allows the buyer to continue earning interest on the deposit they’ve saved until settlement date and the deposit bond assures the vendor they will be paid the full sum on settlement. Deposit funds can also be arranged quite quickly, with approval granted in just minutes in many cases, though a small fee of between 1 and 2% will be charged. This is often a better solution than trying to release or get access to the cash deposit, which may be tied up in a first home buyer’s investments or another property’s sale; in the case buyers who already own a property.

In the case of first home buyers there are some conditions. Generally, the buyer must have secured finance approval and the property in question must settle within a six month period. Assuming these conditions are met, a deposit bond is relatively easy to secure. If however they cannot be met, a guarantor may be able to apply for the deposit bond on the buyer’s behalf.

Deposit bonds usually have periods of validity attached to them. A short term bond can cover a six month period while a long-term bond can be offered for up to three or four years. A deposit bond for a specified period acts in some way like a blank cheque would (though the bond deposit amount is usually pre-agreed up to a maximum limit). It allows buyers to search for the ideal property, knowing that on agreement to purchase, they need only to fill in the vendor’s name and property details and hand over the deposit bond. It also solves the problem of not knowing what a property will sell for at auction. Buyers can stipulate the maximum amount they will need for the deposit bond and, if less is required on the day, they can complete the Bond for the lower amount.

There are some issues where deposit bonds are concerned, but these can be addressed by talking to the agent involved. There are a number of costs involved in selling a house and a vendor may be hoping to request, through their solicitor, that the deposit to be released following an exchange of contracts to cover a range of expenses. This could mean that not only can you not use your deposit bond, you may miss out on the property if someone else has a cash deposit available on the spot (in the event of a Private Treaty sale rather than auction.

For first home buyers, the best option is to first speak with your chosen lender about your eligibility for a deposit bond and their specific conditions around issuing one to you. Once you understand what’s involved, consider whether a deposit bond is actually a more convenient solution for you than simply using the cash deposit you already have.