Sometimes a lender will provide a cash substitute to the seller on the buyer’s behalf, with the intention that the buyer will later pay the deposit for the property at settlement. This is known as a deposit bond.
Why use a deposit bond?
This can be advantageous for a buyer as it provides additional time to organise their finances before settlement. A Deposit Bond is generally a prompt way of arranging the deposit for the purchase of a residential property. Presenting a cash deposit can be equally as fast, however many buyers may be funding their entire new purchase from the sale of a previous property. Other times, funds may be locked into a fixed term, which will mature prior to settlement. Selling investments to fund the purchase may also be untimely.
Deposit Bonds enable purchasers, to be readily available when finding their property. These are quite a popular strategy for all types of buyers, including investors and owner occupiers. Many use them when buying off the plan while they continue saving through the construction phase.
Does a deposit bond replace the property deposit?
In one word… “No”
A deposit bond is a guarantee that the deposit will be paid at a future date. Deposit bonds are underwritten by an insurer that guarantees the vendor that the deposit will be paid in full at settlement. This means that the buyer still needs to pay for the property deposit. It is essentially a strategy where the buyer can execute a purchase without the need of releasing physical cash up front. Buying them more time to prepare themselves for settlement in advance.
How long does a Deposit Bond last for?
A deposit bond is a short term agreement with an insurer. The terms are generally between three-six-twelve months. In many case an off the plan purchase may take longer and there are longer terms available to cater the buyers needs.
What happens if the purchaser fails to complete the purchase?
If the purchaser fails to complete the purchase of the property and has used a deposit bond, the vendor or the holder of the bond has the right to present the deposit bond to the Insurer and claim the full amount of the deposit bond. The Insurer will then seek reimbursement from the purchaser for any monies paid by it plus any other costs and expenses.
Where do you get a deposit bond from?
Not all lenders offer this service directly. We strongly recommend speaking to a mortgage broker. To learn more about why we recommend a mortgage broker please CLICK HERE.
While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you want to learn more, please contact us. We welcome the opportunity to assist you.
Dec 2018
