In the market for a new home, or maybe your first home and you want to know if a deposit bond is the right choice?
No matter if you are a first home buyer, upsizing for your growing family, downsizing for retirement, a seasoned property investor, or buying off the plan, we're going to bet you have a few questions.
Here we'll go over the 10 most common questions about deposit bonds and give you the tips you need to navigate your way to a successful settlement.
#1. What is a deposit bond?
A deposit bond is also sometimes called a deposit guarantee. It is an insurance policy drawn up to act as a guarantee to the homeowner that you have the ability to pay the deposit. It means that you don't have to pay your deposit (usually 10%) at the time of sale, you can wait until settlement.
#2. When do I pay the deposit amount back?
A deposit bond is not a loan, no one pays the deposit on your behalf, you simply pay the full sale price of the new home (including deposit and land tax) at settlement. The current homeowner agrees to wait until settlement to receive the money.
#3. How much does a deposit bond cost?
The only money that exchanges hands before the settlement date is the deposit bond fee. Every provider is different and can usually provide an instant quote showing the exact fee depending on the deposit amount and length of time required. You pay this one-off fee to the provider up-front and it's not especially expensive, especially when you consider that you can continue to earn interest on your savings right up until the settlement time.
#4. How long does the deposit bond need to last if I am buying off the plan?
When buying off the plan you need to factor in the "sunset clause" date. This is a builder's guarantee that the building will be completed within a certain timeframe. Some vendors specify in their contract that a deposit bond needs to cover a longer timeframe so always read the contract fine print and talk to your conveyancer about your plans to use a deposit bond before you sign a property contract.
#5. Does every vendor accept deposit bonds to secure the home purchase?
No. It is up to the vendor and also the real estate agent on whether or not deposit bonds are accepted rather than a cash deposit. In some cases, the vendor may need the cash to secure their next home or to pay the Real Estate Agent. Never assume a deposit bond is an accepted form of purchase deposit and be sure to always get written permission in advance from the real estate agent or the vendor directly if you plan on using a deposit bond. Buying a home, especially winning a home at auction and not being able to meet deposit requirements can have serious financial consequences.
#6. Is there any difference between a deposit bond and a bank guarantee?
A lending institution (like your lending agent) can draft a similar agreement, however, this is more to cover your debt if you fail to make a settlement so cash sum or proof of equity will need to be given as part of this security.
Typically, deposit bonds are significantly cheaper, faster and much easier to process than a bank guarantee.
#7. How soon can my deposit bond be issued?
Turnaround times can be quick, even as fast as two hours. It takes around 15 minutes to work through the preapproval. An online form can be prepared within an hour and your deposit bond can be with you an hour after your signature in many cases.
You can also have your deposit bond prepared without knowing the name of the vendor so you can be preapproved for a deposit bond well before you go to bid at auction, or even multiple auctions in one day, not knowing which home you might win.
#8. What are the eligibility requirements for a deposit bond?
Every case is carefully considered with an asset, income and liability assessment. If you have a family member as your guarantor with their property with equity, they will also be subject to the assessment. The supporting documents you need will depend on your application type.
Faster deposit bonds are possible when you hold formal finance approval or have conditional finance approval that is subject to valuation. Other times when deposit bonds are especially helpful is for those who are selling their current property but haven't secured a buyer before their new purchase is signed. In this case, the money expected to come in from the sale will usually be considered adequate for a deposit bond.
Usually, settlement periods are inside of six months for deposit bonds, if your settlement date is longer than six months you may need to agree to further financial assessment.
#9. Can first home buyers get a deposit bond?
Yes. Even first home buyers can easily obtain a deposit bond if they already have formal approval for their finance through a family guarantor loan.
Special considerations will need to be made for settlement periods for more than six months or if you don't already have finance approval. In these cases your guarantor will need to apply with you for your deposit bond, to ensure the guarantor can pay back the deposit bond amount in the unlikely event of a claim on your bond.
#10. How do I obtain a deposit bond?
You can use a service like Deposit Assure who will take good care of you and go through the process step by step, or you can get in touch with a deposit bond provider directly.
Always be sure to talk to your conveyancer before you sign a property contract and let them know your payment plans so they can make sure your contract matches your goals.