Deposit Bonds - What are they and how do they work?
Deposit Bonds are an alternative source of deposit funds for purchasing a property when you simply do not have the cash to use because your funds are tied up in another
transaction that has yet to settle. Many people mistake a Deposit Bond for a Bank Guarantee – whilst they both work in similar ways, a Bank Guarantee requires you have the cash in a savings account whereas a Deposit Bond only requires evidence of available equity.
As an example
We recently had a client that had sold his property and had just a very small home loan remaining. So, his equity position was around 85% of the value of his home. He was hoping to bid at an auction that following Saturday however the deposit that had been paid for his property would not be released for at least 28 days (allowing for relevant paperwork etc.)
The solution was a Deposit Bond, as this guarantees the vendor will have their money come settlement day.
A Deposit Bond can only be issued when certain qualifying criteria are met such as:
- Evidence of an unconditional contract of sale of your current property
- Evidence confirming any liabilities owed to a lender for property
- Sufficient evidence of equity to cover the deposit amount
- Evidence of a conditionally approved home loan to purchase the new property.
So, in this situation, you don’t actually need to use your cash, especially if you don’t have access to it yet. The Deposit Bond is the Guarantee to the vendor that come settlement day, all monies owed including the deposit will be available to complete the transaction. And yes, there is a cost involved to arrange a Deposit Bond, but the charge is comparable to what a Bank Guarantee would be.
Most selling agents are aware of Deposit Bonds and how they work, and most are happy to work with buyers and brokers to accommodate as they understand a sale is a sale.
However, there are some agents that prefer to not accept them simply because they need to wait until settlement to get paid their commission. It is often best to ask your solicitor or broker to contact the vendor’s solicitor before the auction to see if they will accept a Deposit Bond as guarantee of deposit until settlement.
Your broker is the person to arrange a Deposit Bond so if you would like further information on arranging this, call me on 0438 041 111 and I will be happy to discuss.
As always, enjoy life, work hard, play safe and remember that we are always here to help you
‘Take the Confusion Out of Lending’
Peter Vinci - 0438 041 111