A deposit bond sometimes referred to as a Deposit Guarantee, is an insurance policy that acts as a guarantee to the vendor that a purchaser will pay the deposit at settlement.
A deposit bond acts as a cash substitute and can be used when exchanging contracts at auction. It is particularly useful when you don’t want to, or can’t, immediately produce the cash required for the up-front deposit, which is usually 10% of the purchase price.
There are various reasons for using a deposit bond rather putting down a cash deposit to secure your new home. Some of the common areas are listed below:
- Cheaper alternative to bridging finance – if you are waiting on funds to come through from the sale of another property, a deposit bond can be a cheaper alternative to bridging finance and it gives you, as a buyer, reassurance that the new property will be held until you settle your own property’s sale.
- Use at multiple auctions – while the deposit bond is fixed, the vendor and property details can be left blank for you to complete, should you become the successful bidder at an auction. This is particularly handy if you are attending multiple auctions. Bear in mind that you need to get prior consent from the auctioneer to use a deposit bond.
- Buy property off the plan – Long-term deposit bonds can last up to 4 years, which can be very useful in buying properties off the plan. You need to firstly check that the developer accepts deposit bonds, and if it does, you will then have some extra time to save up for your property plus earn as much interest as possible on your savings until settlement takes place.
Disadvantages of using a deposit bond
Deposit bonds can cause issues for all parties involved if prior consent has not been given for their use. Some reasons why deposit bonds may not be suitable are:
- Some vendors may refuse to accept a deposit bond – especially if they need early access to the deposit in order to secure a new home for themselves. A deposit bond, being no more than a guarantee, cannot be used by a vendor for this purpose.
- Real Estate agents are typically paid their commission from the deposit – so it is possible that they will refuse to accept a deposit bond because they want payment as early as possible in the sale process.
- If prior consent has not been granted by the vendor and stipulated in writing – using a deposit bond may be in breach of the contract terms and the buyer may be liable for any additional costs.
- They can be costly and difficult to get approved – a full credit application is required.