What is a deposit bond?

A deposit bond, sometimes referred to as a deposit guarantee, is an insurance policy that acts as a guarantee to the vendor that the purchaser will pay the deposit at settlement.

A deposit bond acts as cash substitute, and can be used when exchanging contracts and at auctions. It's particularly useful when you don't want to, or can't immediately produce the cash required for the upfront deposit, which is usually 10% of the property price.

Why you might want to use a deposit bond

There are various reasons for using a deposit bond rather than putting down a cash deposit to secure your new home. Some of the common ones are listed below.

Cheaper alternative to bridging finance

If you're 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 the buyer, reassurance that the new property will be held until you settle your own property sale.

Maximise interests earned on savings

Since no cash is required upfront when a deposit bond is used, your savings can remain intact and continue to earn interest while you wait for settlement to occur, which could range from a few weeks to a few years (if you're buying off the plan).

Use at multiple auctions

While the deposit bond amount 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 could 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 they do, you'll have some extra time to save up for your property plus earn as much interest as possible on your savings until settlement takes place.

3 reasons not to use a deposit bond

Deposit bonds could cause issues for all parties involved if prior consent has not been given for their use. Here are 3 reasons why a deposit bond may not be suitable.

The vendor

Some vendors may refuse to accept a deposit bond, especially when 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, can't be used by the vendor for this purpose.

The real estate agent

Real estate agents are typically paid their commission from the deposit, so it's possible that they will refuse to accept deposit bonds because they want to get their payment as early as possible in the sale process.

The buyer

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 could be liable for extra costs that they have not been prepared for.

Rule of thumb when using a deposit bond

Always check with the vendor, real estate agent or developer about the use of a deposit bond before getting one. It does cost a fee, and not being upfront about it can cause significant financial woes for you when it comes to formalising your property purchase.

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