What Is A Deposit Bond?

A deposit bond is an alternative to a traditional cash deposit when buying a property. Instead of paying the deposit amount in cash upfront, the buyer provides a deposit bond to the seller. This bond guarantees that the deposit amount will be paid to the seller at a later date, usually at the settlement of the property.

In real-estate contracts, a deposit bond substitutes for the typical 10% deposit paid when exchanging contracts. It serves as insurance that the buyer will provide the deposit at the time of settlement.

By using a deposit bond, buyers can avoid liquidating their assets or obtaining a short-term loan to cover the deposit. This can be particularly beneficial for those who have their funds tied up in investments or are waiting for the sale of another property.

In summary, a deposit bond provides a secure and convenient way to meet deposit requirements without the immediate need for cash. It is also known as a deposit guarantee and ensures that the seller is protected, while the buyer gains flexibility in managing their finances.

How Does A Deposit Bond Work

Here is how a deposit bond works:

• A buyer will apply for a deposit bond with a provider.
• The buyer has to prove that sufficient funds will be available to complete the purchase at settlement.
• Once it is approved, a certificate guaranteeing the deposit amount is issued.
• This certificate is given to the seller or the seller’s solicitor, who will hold onto the bond until settlement time.
• The seller or their solicitor can claim the deposit bond only if the buyer does not pay the deposit by the time of settlement.

A deposit bond provides an efficient and flexible alternative to cash deposits, as the buyer does not need to pay the full deposit upfront. The deposit bond guarantees the deposit amount, allowing the buyer to defer paying it until the property settlement date.

The buyer can keep their savings and capital intact rather than having a large sum tied up as a cash deposit.

Types of Deposit Bond

There are generally four types of deposit bonds:

• Residential Deposit Bonds: This is the most common type used for buying residential properties. They can be issued for terms ranging from six weeks to 60 months.
• Commercial Deposit Bonds: Deposit bonds can also be used for commercial property purchases, with terms of up to 48 months.
• First-Home Buyer Deposit Bonds: Some providers offer specialised deposit bond products tailored for first-time buyers.
• Self-Employed, Retiree, and SMSF Deposit Bonds: Deposit bond providers may have specialised products for these types of buyers as well.

Benefits Of Using A Deposit Bond Over A Cash Deposit

Here are the main advantages of using a deposit bond instead of a cash deposit when buying property in Australia:

• You’ll have access to cash and won’t have to dip into your savings, which is crucial when your savings are tied up in equity.
• You’re going for simultaneous settlement i.e. you’ve sold your current home and funds are not yet available as a deposit to buy your new home.
• You’re a first home buyer who cannot come up with the 10% cash deposit.
• You don’t want to pay a penalty for breaking a fixed-term investment or selling shares.
• As an investor, you can use it when your funds are in non-liquid assets. The bond gives you the flexibility to purchase the property immediately instead of waiting for the 10% deposit.
• It’s cheaper than borrowing, especially if you’re getting bridging finance. You just need to pay a small fee to the bond issuer, which is negligible to the interest you’ll have to pay for a loan.
• Application is quick. You just need to sign an application form and provide any necessary documents and it could be approved in less than 3 hours.
• You can bid at auction without having to worry about arranging a cash deposit. These are known as auction bonds. You only need to write down the amount you’ve bid at the auction and pass it over to secure your purchase. If the bid is unsuccessful at the first auction, you can still use the bond at other auctions. You can even get a refund if you return the unused bonds within 30 days of issue.
• Since it is not a loan, you only have to pay a one-off fee, and you won’t have to keep up with recurring interest payments.
• The deposit bond is covered by the National Consumer Credit Protection Act, which includes the National Credit Code (NCC).
• You have the flexibility to choose between a short term or long term deposit bonds, depending on whether your settlement will occur between 6 months to 48 months.
• We can use deposit bond for off-the-plan purchase, buying land or construction with an extended settlement

Limitations Of Using A Deposit Bond

Using a deposit bond is not without its risks or limitations.

• In some cases, the real estate agent or vendor will not accept a deposit bond as part of their contract – so the buyer will have to come up with a cash deposit.
• The applicant has to go through a financial check to ensure that they can pay off the cash deposit along with the purchase price and other associated costs with buying a property.
• Getting a deposit bond does not mean you don’t pay the money – it just delays the payment until the time of settlement. When settlement comes, you have to get all your funds ready for purchase.

Have you determined that the deposit bond option is best for you? Then let’s take a look at how you can apply for one.

How To Apply For A Deposit Bond

When settlement draws near, you eventually have to pay the deposit, plus full purchase price and additional costs like stamp duty; therefore, when you apply for the bond, you have to show evidence that you have sufficient funds to complete the purchase at settlement.

To get approved, you have to show:

• Your formal home loan approval.
• If you do not have formal approval because you’re buying off the plan or at auction or the settlement takes more than 6 months, the bond provider will do an asset income and liability assessment.
• A copy of the contract for property you wish to purchase.
• Evidence of availability of funds like savings, fixed-term deposits, share certificates, etc.
• Bank statements showing where the funds will come from at settlement.
• If applicable, evidence of other funds like First Home Owners Grant.

Who Can Apply For A Deposit Bond?

Anyone looking to buy residential or commercial property (whether it’s off the plan or established), including vacant land and even house and land package, can apply.

The following can apply:

• Australian citizens and permanent residents
• People purchasing through trusts
• People purchasing through SMSFs
• Registered business entities
• Partnerships

Required Documents for Deposit Bond Applications

The documents you’ll need to get approved for a deposit bond are:

• A copy of the contract of sale
• A copy of home loan approval
• Evidence of funds
• A copy of any grant letters (if applicable).

If you already have formal approval or will settle within six months:

• Contract of sale of purchase property
• Contract of sale for the sale of property
• Letter from your bank or lender for finance approval
• Photo ID of all applicants

If you’re buying off-the-plan or the settlement will take more than six months, or if you’re buying through SMSF or company:

• Contract of sale of purchase
• Proof of income (payslips) or tax returns (past two years)
• Rates notices for properties owned
• Rental statements for investment properties (if applicable)
• Photo ID of all applicants

How much does a deposit bond cost?

It usually costs about 1.3% of the deposit required, which is a one-off fee.

Short deposit bonds, which are valid up to six months, usually cost around 1.3% of the deposit amount. Long-term bonds, which are valid from 6-48 months, have their cost set case by case.

For example, for a $300,000 purchase (if the settlement is less than 6 months), you will need a deposit of $30,000 (10% of the purchase price), the deposit bond premium is $390 ($30,000 x 1.3%).

You can use our deposit bond calculator for more details.

How Long Does Deposit Bond Approval Take?

The approval process for a deposit bond typically takes 4-48 hours, depending on the complexity of the application.