If you are in the process of purchasing a home, you might have come across the term ‘deposit bond’.
What is it and do you need one? How to get a deposit bond in Australia and how much do they cost?
We have all the answers for new home buyers.
What is a Deposit Bond?
Deposit bonds are a financial instrument that may be used “in place of a deposit when a buyer exchanges contracts on a property,” according to the Australian Securities and Investments Commission (ASIC), guaranteeing the seller that the buyer will pay the full deposit on an agreed date.
Insurance companies are primarily responsible for issuing deposits, despite their popularity among banks and financial organisations.
How does it work?
When purchasing a home or other property, deposit bonds are used instead of a cash down payment. Anyone wanting to buy a deposit bond must apply to the insurer or lender issuing the bond, and satisfy financial criteria, much like those required for other forms of borrowing. In most cases, the bond issuer will need your income and credit history information.
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Once approved for the bond, the deposit is paid to the issuer, who then holds it as security until the property sale is finalised. The buyer may pledge the bond as collateral for a loan from the bond issuer in the event of financial difficulties.
The bond works as insurance for the seller if the buyer fails to pay the deposit in full on the agreed date. The bond issuer will then be able to use the bond as payment toward the outstanding deposit.
Types of deposit bonds:
Deposit bond on loan approval – this deposit bond follows the lender’s home loan application procedure (typically, unconditional loan approval has to be given, although approval subject to valuation only is acceptable when a buyer is purchasing at auction). These deposit bonds are the most affordable, with terms up to 12 months.
A deposit bond does not require approval from a lender – this deposit bond is not linked to a lender’s loan approval procedure. The application procedures for this sort of deposit bond are more complicated.
This type of deposit bond is more costly due to the extra effort involved in evaluating the application. A deposit bond of this kind may be valid for up to 48 months.
3.The “low docs” deposit bond – a “low-documents” deposit bond is based on the purchaser’s current home’s available equity. The deposit bond applicant “self-certifies” their income and is only required to provide primary evidence to support it:
- the identification of the deposit bond applicant
- the Capital Improved Value that will secure your property as collateral for a deposit bond
- repayment history on the current mortgage of the deposit bond applicant (if any)
- a copy of the deposit bond applicant’s contract of sale must be provided.
Why use a deposit bond?
A deposit bond has several advantages, including:
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- Savings consistency
- The ability to accrue interest
- Expensive time delays and bridging finance may be avoided
- It’s possible to purchase “off the plan”
- It’s feasible to buy at auction (make sure the auctioneer is aware of it).
How to Get a Deposit Bond?
There are a few ways to get a deposit bond in Australia. You can get a deposit bond from an insurance company or get one from a bank or other lending institution.
To get a deposit bond from an insurance company, you’ll need to apply for one. You’ll need to provide information about your income and credit history, and you may also need to provide other details.
To get a deposit bond from a bank or other lending institution, you’ll also need to apply for one. The application procedures will be more complicated than if you were to apply for a deposit bond from an insurance company. You may also have to provide information about your income and credit history.
Where to get one?
Many banks find the process of setting up a deposit bond to be too costly, and they may offer no-deposit bonds instead.
Only one of the “Big Four” banks in Australia offers deposit bonds: Westpack provided its Deposit Protect Bond with a 6-month short-term guarantee. IMB provides a deposit bond program called “a deposit power guarantee”, and RAMS offers a deposit bond as well.
However, several specialist firms provide deposit bonds; some even assist you in locating one through a smaller company that specialises in no-deposit bonds. You may also contact these businesses directly.
Here are a few deposit bond specialists:
- Insurer QBE
- Deposit Power
- Deposit Bond Australia
How Much Does a Deposit Bond Cost?
The terms and conditions of deposit bonds differ from one lender to another. Different deposit bond providers have varying costs. The overall amount is generally determined by the property being purchased and whether you have been “pre-approved” for finance.
Several deposit bond firms reveal that a buyer might expect to pay between 1.2% and 1.5% of the total purchase price. Many deposit bond companies provide a calculator that allows you to compute costs before making any decisions.
The duration of a deposit bond can vary depending on the type of deposit bond you get. For example, some deposit bonds last for up to 48 months, while others last for 12 months.
How Long Does it Take to Get a Deposit Bond?
It usually takes a few days to get a deposit bond. First, you’ll need to provide information about your income and credit history which can affect your rating for several years, and you may also need to provide other details. Once you’ve provided all the info, the deposit bond company will process your application.
The deposit bond is sent after it has been authorised. The signed deposit bond is sent to all parties (conveyancer/solicitor on both sides, real estate agent, mortgage broker, and the purchasers) immediately after approval.
Finally, the signed deposit bond is sent by express overnight post to the designated party, usually the buyer’s solicitor or conveyancer.
Wrapping Up
A deposit bond can be a great way to protect your investment in a property. By understanding what they are, how they work, and how to get a deposit bond, you can ensure that you get the best possible protection for your money.
1. How do deposit bonds work?
A deposit bond allows a client to pay a deposit (up to 10% of the purchase price) using the deposit bond instead of cash from their accounts. Until settlement, nothing changes hands. The purchase price is paid at settlement, and the bond expires.
2. How long does it take to get a deposit bond?
It usually takes a few days for a deposit bond to be issued. This depends on where you get it as there are several methods you can try when it comes to how to get a deposit bond in Australia.
3. Do vendors accept deposit bonds?
Some vendors may refuse to take a deposit bond, particularly if they need early access to the deposit to find a new residence. In addition, the seller cannot utilise a deposit bond as a guarantee because it is only a pledge.
