When buying a home, you need to pay a deposit of up to 10% of the purchase price.
However, you may not always have cash in hand or want to use your savings to pay the required deposit.
This is when a deposit bond can help you.
What is a deposit bond?
A deposit bond, also known as deposit guarantee, is a substitute for cash deposits that are needed when buying a home or when bidding at auctions.
It is a guarantee that is used instead of cash to pay for your deposit when you exchange contracts on a property purchase.
The bond acts as an insurance that the buyer will come up with the deposit at the time of settlement.
The person who takes out the bond is responsible for paying the deposit amount and 100% of the purchase price at settlement.
If the buyer fails to close the purchase at settlement, then the vendor claims the deposit guarantee from the bond provider.
How do deposit bonds work?
A buyer will apply for a deposit bond with a provider.
The buyer has to prove that sufficient funds will be available to complete the purchase at settlement.
Once it is approved, a certificate guaranteeing the deposit amount is issued.
This certificate is given to the seller or the seller’s solicitor, who will hold onto the bond until settlement time.
The seller or solicitor can only claim the deposit bond if the buyer does not pay the deposit by the time of settlement.
How to get approved for a deposit bond?
When settlement draws near, you eventually have to pay the deposit, plus full purchase price and additional costs like stamp duty.
Therefore, you have to show evidence that sufficient funds to complete the purchase at settlement.
To get approved, you have to show:
- Your formal home loan approval.
- If you do not have formal approval because you’re buying off the plan or at auction or the settlement takes more than 6 months, the bond provider will do an asset income and liability assessment.
- A copy of the contract for property you wish to purchase.
- Evidence of availability of funds like savings, fixed-term deposits, share certificates, etc.
- Bank statements showing where the funds will come from at settlement.
- If applicable, evidence of other funds like First Home Owners Grant.
We can lodge a deposit bond application on your behalf when you’re applying for a home loan.
Call us at 1300 889 743 or fill in our free assessment form.
How much does a deposit bond cost?
It usually costs about 1.3% of the deposit required, which is a one-off fee.
Short deposit bonds, which are valid up to 6 months usually cost around 1.3% of the deposit amount, while long term bonds, which are valid from 6 months to 48 months are looked into on a case by case basis.
For example, for a $300,000 purchase (if the settlement is less than 6 months), you will need a deposit of $30,000 (10% of the purchase price), the deposit bond premium is $390 ($30,000 x 1.3%).
You can use our deposit bond calculator for more details.
Who can apply for a deposit bond?
The following applicants are accepted:
- Australian citizens and permanent residents
- Registered business entities
What documents do I need to show?
To get approved for a deposit bond, the documents needed are a copy of contract of sale, copy of home loan approval, evidence of funds and copy of any grant letters (if applicable).
If you already have formal approval or will settle within 6 months:
- Contract of sale of purchase property
- Contract of sale for the sale of property
- Letter from your bank or lender for finance approval
- Photo ID of all applicants
- Contract of sale of purchase
- Proof of income (payslips) or tax returns (past two years)
- Rates notices for properties owned
- Rental statements for investment properties (if applicable)
- Photo ID of all applicants
- You’ll have access to cash and won’t have to dip into your savings, which is crucial when your savings are tied up in equity.
- You’re going for simultaneous settlement i.e. you’ve sold your current home and funds are not yet available as a deposit to buy your new home.
- You’re a first home buyer who cannot come up with the 10% cash deposit.
- You don’t want to pay a penalty for breaking a fixed-term investment or selling shares.
- As an investor, you can use it when your funds are in non-liquid assets. The bond gives you the flexibility to purchase the property immediately instead of waiting for the 10% deposit.
- It’s cheaper than borrowing, especially if you’re getting bridging finance. You just need to pay a small fee to the bond issuer, which is negligible to the interest you’ll have to pay for a loan.
- Application is quick. You just need to sign an application form and provide any necessary documents and it could be approved in less than 3 hours.
- You can bid at auction without having to worry about arranging a cash deposit. These are known as auction bonds. You only need to write down the amount you’ve bid at the auction and pass it over to secure your purchase. If the bid is unsuccessful at the first auction, you can still use the bond at other auctions. You can even get a refund if you return the unused bonds within 30 days of issue.
- Since it is not a loan, you only have to pay a one-off fee, and you won’t have to keep up with recurring interest payments.
- The deposit bond is covered by the National Consumer Credit Protection Act, which includes the National Credit Code (NCC).
- You have the flexibility to choose between a short term or long term deposit bonds, depending on whether your settlement will occur between 6 months to 48 months.
- It can even be used for an off the plan purchase, under land or construction with an extended settlement.
- In some cases, the real estate agent or vendor will not accept a deposit bond as part of their contract – so the buyer will have to come up with a cash deposit.
- The applicant has to go through a financial check to ensure that they can pay off the cash deposit along with the purchase price and other associated costs with buying a property.
- Getting a deposit bond does not mean you don’t pay the money – it just delays the payment until the time of settlement. When settlement comes, you have to get all your funds ready for purchase.
- Bank guarantees are secured, which means they require real estate or cash security to release, while deposit bonds are unsecured.
- Bank guarantees usually have a higher setup and ongoing costs than the deposit bond’s one-off fee.
- Bank guarantees need more paperwork while deposit bonds are quicker to obtain.
If you’re buying off the plan or the settlement will take more than 6 months, or if you’re buying through SMSF or company:
Why should I use a deposit bond?
There are several reasons and situations why you should use it:
What are its risks?
There are some risks associated with a deposit bond as well:
A note of caution!
In Victoria, deposit bonds are rarely used because of a provision in its Sale of Land Act 1962, which allows for the early release of cash deposits.
The contracts drawn up by agents in Victoria stipulate that deposit bonds are not allowed as part of its sale process.
Are there any alternatives to deposit bond?
The best alternative would be to get a personal loan and borrow the required deposit.
However, to qualify, you must earn a high income, have little to no debts and a clear credit history.
Moreover, there are only a handful of lenders who accept personal loan as a deposit when getting a mortgage.
Deposit bond vs Bank guarantee – what’s the difference?
While the idea behind a bank guarantee and deposit bond are similar, there are differences between them.
A bank guarantee is a guarantee from a lender to ensure the liabilities of the debtor will be met.
The key differences between them are:
Who offers deposit bonds?
Deposit bonds are offered by most banks and financial institutions and are also issued by insurance companies.
There are also deposit bond providers in Australia like Deposit Power, Deposit Bond Australia, Aussie Bonds and Deposit Underwriters.
Frequently Asked Questions
Will I get a refund if I don’t proceed with the contract of sale?
You get a refund only when you’ve returned the deposit bond within 30 days of issue.
The cost of the deposit bond, minus the issue fee is refunded.
When do I pay back the deposit?
You don’t pay the deposit until the seller/solicitor makes the claim on it.
You will pay the seller the full purchase price, along with the deposit and other additional costs at the time of settlement.
The additional costs include transfer fee, mortgage registration fee, conveyance fees, Lenders Mortgage Insurance (LMI), inspection fees, etc.
The only money that changes hands is the deposit fee which you pay to the bond provider upfront.
Can I use a deposit bond under a guarantor loan?
Yes, it can be used with a guarantor loan, if there is formal approval and the settlement is less than 6 months.
In this case, your guarantor does not have to sign the deposit bond.
However, if the settlement takes more than 6 months, or there is no formal approval, then the guarantor will have to sign the bond and will be liable to pay the deposit if the buyer does not pay the deposit amount.
Can it be used for land purchase?
Yes, you can use a deposit bond for land purchase while you wait for the land title to be registered.
To find out more, or if you need help with your deposit bond application, please call us at 1300 889 743 or complete our free assessment form.