- Check with the seller and auctioneer before bidding. You'll need the seller's permission to use a deposit bond, so make sure everyone is on the same page before the auction.
Key takeaways
- When buying property you need to pay a 5-10% deposit on the day you sign contracts (or the day of the auction).
- But if you can't access the cash you need for a deposit then a deposit bond can cover you temporarily.
- A deposit bond is useful when buying at auction, where you need to pay a 10% deposit quickly. But you need the seller's approval before using one.
What is a deposit bond?
Deposit bonds exist to help people cover the time between buying a property and selling their old one. Sometimes when settlement times don't line up you can end up owing a 10% deposit on a new place before you've got the cash from selling your old property.
A deposit bond is a guarantee that you will pay the cash at settlement rather than up front. Banks offer deposit bonds but an insurance company actually issues the bond.
The deposit bond functions in a similar way to a bank guarantee, where the bond provider (or insurance company) agrees to pay the deposit to the seller in the event that the purchaser does not complete the sale.
How it works
Let's say you bid for a property at auction and you're the winner. In a transaction like this you'll need to provide a 10% deposit quickly.
If you're still in the process of selling your old home you might not have a 10% deposit ready to go.
You can take a deposit bond to the auction and use it when exchanging contracts. Most deposit bonds are good for up to 6 months, so this gives you flexibility when bidding at multiple auctions.
How much does a deposit bond cost?
The cost of a deposit bond is determined by the property value and the amount of time until settlement.
As a rule of thumb, you will pay approximately 1.2-1.3% of the purchase price as an ad hoc fee. To demonstrate, if you were buying a property for $830,000 and needed a 10% deposit of $83,000, it would cost you around $1,079 for a deposit bond with a 6-month term.
These bonds can be issued in the short term (up to six months) or long term. The longer the term, the more you have to pay.
Cheaper than a bridging loan
A deposit bond can be a good alternative to a bridging loan. A bridging loan is basically a form of finance (rather than insurance) that lets you borrow the funds you need for your deposit.
It's a short term solution like a deposit bond, and gives you up to 12 months to repay the loan. But it can be more expensive than a deposit bond.
Who is a deposit bond suitable for?
A deposit bond is suitable for the purchaser who is "asset rich but cash poor". It may be useful for existing property owners who wish to purchase another property, investors who wish to diversify their portfolio, and first home buyers who do not have enough genuine savings for the deposit.
- Property owners. A deposit bond can be helpful for those who are selling and buying at the same time and whose equity is tied up in existing property.
- First home buyers. If you’re a first home buyer, you may not be in a position to provide the deposit upfront until you receive a government grant or gift from a family member.
- Auction buyers. If you’re planning on buying at auction, you may prefer the convenience of not having to budget for the deposit for each auction that you attend.
- Off-the-plan buyers. A deposit bond may be useful if you’re buying off-the-plan because it means you can avoid having to come up with cash deposit funds until settlement.
- Investors. A deposit bond is ideal for property investors who are looking to defer payment of the cash deposit until settlement. If you don’t want to tie up your cash before settlement so you can keep earning a better return elsewhere, a deposit bond may be a convenient option.
A deposit bond can be a good alternative to a bridging loan.
Who offers deposit bonds?
Deposit bond specialists
Note that while many lenders won't issue a deposit bond directly they may help you find one through a smaller company specialising in deposit bonds. You can also enquire directly with these companies.
Here are a few deposit bond specialists operating in Australia:
- Deposit Power
- Deposit Bond Australia
Australian banks used to offer deposit bond products but they no longer do.
Risks and benefits of deposit bonds
Benefits
- Cost savings. Deposit bonds can be relatively cheap. For instance, if you applied for a three-month deposit bond of $30,000, you would incur a fee of around $300. On the other hand, bridging finance would cost around $900-$1,000. In this example, a deposit bond would save you around $600.
- Convenience. A deposit bond provides a fast and convenient way of accessing a deposit without having to organise alternative options such as bridging finance or an equity release from existing property.
- Long settlement periods. Deposit bonds are normally available between 6 months and as long as 48 months, which may suit you if you’re buying property off-the-plan or vacant land with extended settlement periods.
Risks
- Inflexible. Sellers that want an early release of the deposit may be reluctant to accept a deposit bond. There's no guarantee a seller will accept one. The seller's real estate agent might not agree either.
- Contract of sale. Most contracts for sale must include the relevant clauses that enable the deposit bond to replace a cash deposit for the property. It is therefore essential that you consult a legal professional to ensure that the paperwork is correct.
Susannah opts for a deposit bond
Susannah has decided to buy a property off-the-plan at a purchase price of $640,000 in Terrigal, NSW. Susannah is a first home buyer and doesn’t have the required 10% cash deposit for the maximum guarantee amount of $64,000, so she approaches her bank to see whether a deposit bond would be a good option.
With a required settlement term of 36 months, Susannah's bank manager estimates that the deposit guarantee fee will be $6,240, which is favourable compared to other options such as bridging finance or a personal loan.
After working out the cost savings comparison between a deposit bond and these alternative forms of finance, Susannah decides to consult both a mortgage broker and a solicitor to help prepare the deposit bond and contract of sale for her purchase.
Frequently Asked Questions
Ask a question
4 Responses
More guides on Finder
-
Can I use my super to buy a house?
How a self managed super fund can help, plus options for first-time buyers explained.
-
House deposit calculator
Find out how much deposit you need to qualify for a home loan in Australia.
-
The benefits of having a larger deposit
The larger your deposit, the better your chances of getting your home loan approved.
-
Single parent home loans
If you're a single parent buying a home, you may be able to use Centrelink payments to supplement your income.
-
Using a gifted deposit for your home loan
Getting a home loan deposit from family as a gift? Cash gifts can help you get on the property ladder, but you need some genuine savings, too.
I need a short term loan of $500,000 to pay for the property I have contracted to buy but have not yet sold my property, which is worth more than the one I am buying. I see there are deposit bonds and bridging loans available. I do not have a mortgage on my property. What would you suggest?
Hi Robyn,
This really depends on your specific circumstances. It might be best to speak to a mortgage broker about your options.
On our page, you can also check out the list of lenders who offer deposit bonds. Many lenders won’t issue a deposit bond directly but they may help you find one through a smaller company specializing in deposit bonds.
Thanks,
Richard
I’m looking for the best provider of a deposit bond to purchase off the plan. Deposit value $78000. Sunset date 3.5 years from contract date. We will be selling our current home in 12 months (so no contract yet). Your site recommend Aussie home loans but they are no longer offering deposit bonds. Can you confirm who else does this.
Hi Ann,
Thanks for your inquiry.
In the table above, there are also other mortgage brokers who can help you find a deposit bond or home loan apart from Aussie. Meantime, Aussie not only offers their own mortgage products but also connects customers with 20+ lenders so they’re still a useful option if you’re looking for a deposit bond.
Cheers,
May