One of the biggest challenges to owning a first home is saving for a deposit.
Many buyers find their ideal property before the task of gathering a deposit is complete yet still want to move forward.
One solution can be a financial instrument called a Deposit Bond. At its most basic, it’s an insurance policy that promises the vendor that the deposit will be paid at settlement, along with other outstanding funds. No actual money exchanges hands.
This can be an ideal solution if you are intending to buy off the plan, waiting for approval for additional funds from a lender, or have secured a property at auction.
The bond alleviates the need for bridging finance, which can be expensive, delay the progress of a transaction and be a burden on your personal cash flow.
While there three types of Deposit Bond, the most common one is usually issued only after a lender has approved your finance. They have an average 12-month tenure and can be used at multiple auctions.
Long-term Deposit Bonds may last for up to four years and can be the perfect instrument when buying off the plan because of the time it takes to construct a development.
A Deposit Bond can also be used by investors who leverage equity in their existing assets but lack readily available cash for a deposit.
Using a Deposit Bond means you can attend an auction with confidence in your bidding position. However, you must inform the real estate agent beforehand that you intend to use a Deposit Bond.
Some vendors may refuse to accept it. A common reason is that they have budgeted to use your cash deposit to help them buy their next property.
Resistance can also come from agents, who like to know their commission can be paid from the buyer’s cash deposit. They will cite the sale contract, which usually says the deposit needs to be “paid”. Your Deposit Bond is a guarantee, not a payment.
If you have bought at auction and not spoken with the agent, this can quickly turn into a serious issue. Unlike a sale where there is a cooling off period, your bid at auction is binding. If the vendor rejects your Deposit Bond and insists on cash, you may need to return to your bank to apply for bridging finance.
So, avoid conflict by being clear with the agent before you bid on a property or enter into any contract.
On the upside, a Deposit Bond allows you to continue to maximise the interest you will be earning on your savings during the transaction period.
In summary, a Deposit Bond is
- A guarantee of a deposit
- Only issued when finance is approved
- A valuable financial instrument when buying off the plan
- A way to keep your own money in the bank.