FAQ's
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Applying for a Deposit Bond?
Who can apply for a Deposit Bond?
As to who can apply, any Australian permanent resident (or those with permanent visas), trusts, self-managed super funds, registered business entities, partnerships, etc., looking to purchase Australian based residential or commercial real estate (‘established’ or ‘off the plan’), including vacant land and land&house packages.
When can & can’t a Deposit Bond be used?
Deposit Bonds can be requested by Individuals (including first home buyers), Trusts, Self-Managed Super Funds, Business Entities, Partnerships and the like, looking to purchase Australian based Residential or Commercial real estate. The real estate can be vacant land, land & house packages, established property or off the plan.
When can’t a Deposit Bond be issued
(a) the settlement period is greater than six months and the property being purchased is located in a town where the local shire population is less than 50,000 people;
(b) the property being purchased is part of a complex where the apartments are independently owned, but are on-leased to a proprietor to operate as a hotel, BnB or similar; or
(c) where an applicant has previously defaulted on a property settlement and the issued Deposit Bond has been claimed.
What are Deposit Bond applicants committing to?
As with any legal document there are terms, conditions & obligations. You need to seek professional advice, so you know what you are agreeing to.
The key three relate to:
(a) the applicants providing accurate information;
(b) privacy of the information you provide, with authority for relevant checks with other agencies, such as your finance providers, your credit history, etc.;
(c) that the applicants are liable to pay the deposit amount noted on the issued Deposit Bond, should they fail to settle on the Contract of Sale.
What are the acceptance criteria for Deposit Bond applications?
If the Buyer has ‘unconditional finance approved’ or has ‘pre-approval, subject to valuation’ from a licensed finance provider, applications are automatically accepted. For all other applications, applicants have to demonstrate sufficient ‘net equity’ in existing Australian based real estate.
Can applicant(s) still get a Deposit Bond if they don’t already own Australian based real estate?
Because Deposit Bonds are issued on an ‘unsecured’ basis (bank guarantees and home loans are typically secured against assets), the Deposit Bond issuer requires that the applicant(s) have existing Australian based real estate. This isn’t obviously the case for first home buyers or newly arrived residents to Australia that may own overseas assets. In both cases, the applicant(s) would need a family member, who has Australian based assets, to go as a Guarantor.
Is there a Maximum Deposit Bond amount?
No, however, the Deposit Bond can never be for more than 10% of the property purchase price.
Can I use part cash and a Deposit Bond for a deposit amount?
Yes, applicants have that flexibility, however, they need to weigh up the pluses and minuses. For first home buyers, demonstrating a savings pattern is key to securing a future home loan, so it may be more desirable to leave cash on term deposit versus using as a deposit.
For ‘off the plan’ purchases, a concern often expressed is ‘What happens to my cash deposit if the developer collapses before the project is completed? Sure, my cash should be held in trust account, but how long before I get my cash back from the receivers?’
How do I get a Deposit Bond?
Head to Contact tab and start by completing the questions on ‘Get A Quote’.
We’ll then be in touch with the best option to match your needs.
You can also seek assistance on 1300 851 351 (BH).
How much does a Deposit Bond cost?
Pricing depends on a couple of factors, mainly the deposit amount required and how long to settlement. As both factors increase in number terms, the Deposit Bond fee rises.
Can we still get a Deposit Bond if all or part of the real estate we own is held in a Trust structure?
Deposit Bonds generally rely on the applicants owning (mainly) real estate assets in their private names, however, there are usually ways we can navigate around the issue. Best we chat about your exact scenario.
What is a Deposit Bond
What is a Deposit Bond (Deposit Guarantee)?
A Deposit Bond is a form of undertaking accepted by sellers/vendors, in lieu of cash or a bank guarantee, where buyers are required to lodge a deposit to secure the purchase of a Residential or Commercial Property, as detailed in the Contract of Sale. Sellers/vendors require a percentage up to 10% of the purchase price, as a deposit.
The issuer of the Deposit Bond guarantees unconditional payment of the deposit bond amount to the seller/vendor in the event that the buyer fails to settle/complete the Contract of Sale.
A Deposit Bond is an Unconditional Demand and as such is accepted by sellers/vendors as equivalent to cash. Importantly, Deposit Bonds are ‘unsecured’, which means that the buyer’s assets, savings or lines of credit can be kept intact, until the settlement date of the proposed property purchase.
How does a Deposit Bond work?
Let’s use the example of a $500,000 property purchase with a 10% deposit required. The process is the same for both short-term settlements involving ‘established’ property (say 4 weeks to 6 months) or long-term settlement involving ‘off the plan’ property (say 24 months).
If using cash, $50,000 is paid upfront and the remaining $450,000 (90%) at the time of settlement.
If using a bank guarantee, the bank will take some form of security over the buyer’s assets or part of an overdraft or line of credit; charge a bank fee: and issue the bank guarantee. As no ‘cash’ has been paid upfront, 100% of the purchase price ($500,000) is paid to settle the purchase and the bank guarantee is released because it is no further use.
If using a Deposit Bond, the buyer pays a Bond Fee; a Deposit Bond is issued; and similar to a bank guarantee, 100% of the purchase price ($500,000) is paid to settle the purchase and the Deposit Bond is released.
With a Deposit Bond, there’s no need to find $50,000 cash up front; there’s no need to take out bridging finance or increase the mortgage or disturb any current investments to generate the $50,000 cash; nor have the bank take extra security over your assets; plus, Deposit Bonds can be issued more quickly than a bank guarantee.
What are the benefits of using a Deposit Bond?
In essence, Deposit Bonds are perfect for buyers who are asset rich and cash poor; first home buyers who don’t have the required 10% deposit or want to leave their savings untouched to demonstrate a savings pattern to their funder; or buyers who don’t want to mess with existing investments until settlement time.
- Don’t have to find upfront cash;
- Typically, owner-occupiers and investors have their assets tied up in property and have limited cash;
- Some might be undertaking a simultaneous sell & buy or downside and have limited cash
- Buyers are reluctant to disturb cash that is working more effectively in term deposits, other investments or don’t want to secure extra finance, with resulting additional costs and having to pay back over an extended period; and
- Whilst the risk is greater with longer term settlements, such as ‘off the plan’, buyers aren’t faced with the risk of paying a cash deposit which then might be tied up for an extended period, if the developer goes into receivership.
When does the Deposit Bond expire?
The Deposit Bond expires when one of the following occurs:
- The Contract of Sale being completed; or
- 4.00pm on the expiry date noted on the Deposit Bond; or
- The original of this document is returned to the issuer, and they are no longer on risk; or
- the applicants/buyers fail to settle on the Contract of Sale has paid all or part of the deposit amount to the vendor.
What happens if the Deposit Bond needs to be extended?
Typically, this is at the request of the seller/vendor. Simply forward us their request and we’ll organise for fresh Deposit Bond be reissued. A $110 reissue fee applies, plus pro-rata of the original term, e.g., if the original term of 18 months has to be extended to (say) 24 months, we will calculate the bond fee for a 24 month period and deduct the amount you have already paid for the 18 month period + $110.
Deposit Bond Support
Are Deposit Bonds widely Accepted?
Yes, however, the seller/vendor can reject. Deposit Bonds originated in 1987 and are now universally accepted Australia wide.
How long can a deposit bond be issued for?
Where Deposit Bond applications are supported by ‘finance approved’, up to 6 months. Without ‘Finance approval’, up to 66 months.
How does the cost of a Deposit Bond compare to a Bank Guarantee?
Bank Guarantees are typically used for ‘Off The Plan’ purchases. You’ll need to check with your bank or adviser.
We’re told that if the Bank Guarantee is secured against a ‘term deposit’, then there’s the offset of the interest received on the ‘term deposit’ versus the cost to issue and ongoing guarantee fee. If you need to extend your loan to secure the Bank Guarantee, then there’s the extra home loan interest cost, plus the issue and ongoing guarantee fee, which, in total, is much higher than the Deposit Bond fee, plus you haven’t tied up any assets as the Deposit Bond is issued on an ‘unsecured’ basis.
Can I get a refund on the Deposit Bond if I don’t proceed with the Contract of Sale?
Sure, so long as the original Deposit Bond is returned within 30 days of issue. See comments related to using bonds for ‘auctions’ below.
How quickly can a Deposit Bond be issued?
If we receive complete paperwork and payment, we can typically have the Deposit Bond within two business days.
What happens with the Deposit Bond after settlement?
It becomes ‘null & void’. It has done it job by acting as the required deposit and the applicants/buyers have subsequently paid 100% of the purchase price to settle.
Using Deposit Bonds for an ‘auction’ purchase
Applicants need to decide if;
(a) they are seeking a Deposit Bond for a particular property purchase or;
(b) looking to ultimately buy and may need to attend a number of auctions before being successful.
We can further advise best approach dependent on (a) or (b).
Using a Deposit Bond for an ‘off the plan’ purchase’
The same concept applies where the Deposit Bond is issued for the number of months or to the Sunset or Registration Date in the Contract of Sale, which is a period beyond the anticipated completion date. This provides the developer with a buffer in the event the project is delayed by bad weather, lack of materials or labour or unexpected damage to the building. Yes, it means the bond fee paid upfront is more, however, read the next FAQ re ‘refunds for off the plan’ Deposit Bonds.
Is there a refund for ‘off the plan’ Deposit Bonds if settlement occurs before the Expiry Date noted on the Deposit Bond certificate?
Yes, there is a pro-rata refund for the unexpired period from the actual Settlement Date of the underlying Contract of Sale to the Expiry Date noted on the Deposit Bond, but certain conditions apply that we can further outline.
To claim the refund, we must receive;
(a) written proof of the actual settlement;
(b) the ‘original’ Deposit Bond;
(c) within 45 days of the Settlement Date. A handling fee of $220 applies. The refund policy only applies if the purchaser(s) noted on the original Deposit Bond settle and take ownership of the noted property. The refund policy doesn’t apply if the property is on-sold during the construction period.
When might a guarantor be required to support a Deposit Bond application?
This mostly occurs for first home buyers where they don’t have ‘finance approved’. We’d look to a direct family member to go as guarantor. If no direct family within Australia, consideration may be given to a close relation, like an Uncle or Aunty. Best chat about your circumstances.
What happens to the Deposit Bond if the buyer can’t settle or complete the Contract of Sale?
Whether using cash, bank guarantee or a Deposit Bond, the net result is that the bond amount is forfeited (i.e., buyers are ‘out of pocket’) by the amount of the deposit.
The seller/vendor demands that issuer pays the Deposit Bond amount and the issuer will seek recovery the bond amount (deposit amount) from the applicants/buyers.
Whilst the Deposit Bond might be supported by an insurance company, Deposit Bonds aren’t a form of insurance, but a form of ‘financial guarantee’.
In essence, applicants/buyers are acknowledging that they don’t have sufficient funds to pay a ‘cash deposit’ and are happy to pay a nominal bond fee to secure a Deposit Bond and pay 100% of the purchase price of the property at date of settlement. If applicants/buyers don’t settle on the Contract of Sale they have entered into, they are obligated to repay the deposit amount back to the issuer, plus any other costs the issuer incurs in recovery of the monies owed, plus, applicants face the risk of having the default recorded on their credit rating.
