1. What is a Deposit Bond?
In Australia when a person or entity enters into a contract to purchase residential property, it is common practice for the purchaser to lodge a cash deposit of up to 10% of the purchase price with the vendor’s solicitor as security for the purchaser’s obligations. The deposit gives the vendor (the seller) a fund against which they can claim if you fail to complete the transaction.
A Deposit Bond is an instrument that, by agreement with the vendor, can replace the need for a cash deposit. It is a convenient way of purchasing a property without the need to arrange a large cash deposit or immediately cashing in or selling an investment that may mature at some point in the future. The Deposit Bond is issued by an insurer to the vendor for all or part of the deposit required.
If the purchaser fails to complete the purchase of the property and has used a Deposit Bond, the vendor or the holder of the Deposit 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.
In essence, a Deposit Bond enables the purchaser to defer until settlement of their 10% deposit.
A Deposit Bond is NOT a policy of insurance. It is a form of surety or guarantee.
2. Why are Deposit Bonds so popular?
A Deposit Bond can be a quick and efficient way of arranging the deposit for the purchase of a residential property. Arranging a cash deposit may take time, especially if the purchaser has not sold their current property or needs to sell investments to raise the required deposit.
Deposit Bonds enable purchasers, whether they be investors or otherwise, to avail themselves of opportunities as and when they arise.
3. Who can use a Deposit Bond?
The product is suitable for virtually anyone contemplating the purchase of a residential property including:
- future home buyers
- home owners upgrading to a new property
- investors wishing to purchase property or additional properties
- owners or investors wishing to purchase properties off the plan.
The product is especially convenient for investors who may have funds tied up in non-liquid assets and who wish to purchase properties when opportunities arise. Finding the 5% or 10% required to enter into a contract on another property may be difficult when investment opportunities arise at short notice. Arranging bank finance or short-term loans may take time and associated costs may be high.
In addition, Deposit Bonds are extremely convenient for older couples who are looking to purchase a property off the plan now in anticipation of having to settle the transaction in one or two years time when the project is due for completion. The preferred option for people in this situation is to sell their house, say six months before settlement is due, however having to raise a large deposit at the present time when contracts have to be exchanged may create an unnecessary financial burden for them. The Deposit Bond allows such purchasers to enter into the transaction and retain their current property until it is more convenient to sell the property and settle the future purchase.
4. Will Vendors accept Deposit Bonds?
There should be no reason why a vendor should not accept a Deposit Bond in lieu of a Cash Deposit. However, most “Standard” Contracts for Sale provide for a cash deposit to be paid.
Therefore, before you agree to purchase a property (or bid at an auction) check with the vendor that they will accept a Deposit Bond instead of a cash deposit. You should also ensure that your solicitor or legal representative inserts the relevant clauses into the Contract for Sale to enable the Deposit Bond to replace the cash deposit.
5. Does a Deposit Bond replace the deposit?
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. The purchaser is still required to pay the deposit in full. The deposit bond saves the purchaser from the need to pay the full deposit in cash when signing a contract to purchase. This means that purchasers can keep their cash and may negate the need to break investments, sell shares or arrange loans to pay the deposit now.
6. How long can a deposit bond be arranged for?
Deposit bonds are split into two types:
Short term bonds for three and six month periods; these are ideal for purchasers buying at auction.
Long term bonds which are generally issued for periods of twelve months through to thirty six months (some bonds are issued for periods longer than this, up to 48 months); These are generally issued for properties which are yet to be built or where completion is some time in the future, typically, “off the plan” projects.
7. When does the Deposit Bond terminate?
The Deposit Bond expires on the earliest of:
- the contract for Sale being completed
- the Expiry Date
- the Contract for Sale being terminated or rescinded and the purchaser being entitled to a refund of the deposit
- payment to the Vendor by the Insurer of The Maximum Bond Amount or such part as the vendor may require
- payment to the Vendor by the Purchaser of The Maximum Bond Amount or such part as the vendor may require.
8. What information is required for an application?
This varies depending on the bond term. However, typically a deposit bond can be arranged quite simply by submitting a simple application form and supporting documents.
9. Important Notes
The information given here is designed to give answers to the basic questions. More detailed information is available on request.
IT IS NOT INTENDED TO PROVIDE A COMPREHENSIVE OUTLINE OF THE PRODUCT OR OF THE OBLIGATIONS AND TERMS OR CONDITIONS