Deposit Bonds

What is a Deposit Bond?

When an individual, private superfund or a business purchases residential or commercial real estate, albeit for own use or as an investment, an immediate deposit, typically 10% of the purchase price, is payable to the vendor in order to exchange the Contract of Sale.
Rather than put up cash or bridging finance, which both tie up working capital, a Deposit Bond acts as an interim substitute for the deposit. Typically a 10% cash deposit is paid upfront, with the remaining 90% paid at settlement date.

With a Deposit Bond, a nominal premium is paid upfront to secure a Deposit Bond for the value of the required deposit and 100% of the purchase price is paid at settlement.
The purchaser retains the use of their cash reserves or avoids having to borrow for the deposit.

 

How does a Deposit Bond work?

Deposit Bonds, underwritten by specialist insurance companies (the ‘guarantors’), replaces the upfront deposit payment. The Deposit Bond guarantees to the vendor that, in addition to the 90% purchase balance due at the settlement date, the 10% deposit will also be paid, i.e., 100% of the Contract of Sale.

In essence, paying the initial 10% deposit is deferred, i.e., the time value of money and the opportunity costs to utilise retained cash for other purposes.

 

Are Deposit Bonds limitless in terms of value or period?

In terms of dollar value, we haven’t hit the limit as yet. In terms of period, we can issue Deposit Bonds on real estate contracts up to 60 months settlement.

 

How are Deposit Bond applications assessed?

The purchase of established real estate is typically settled within a ‘short period’ (under 6 months) and is typically supported by an ‘unconditional’ letter of finance from a recognised financial institution. On this basis, no additional financial assessment is undertaken.

‘Longer term’ settlement of purchased real estate (largely off the plan acquisitions) aren’t typically supported by any form of finance at the time, thus applications are assessed on the applicant’s identification; net assets; and the ability to service the loan.

 

How much does a Deposit Bond cost?

The premium depends on the dollar value of the Deposit Bond and the period of time before settlement. Premiums increase depending on the larger the bond amount and the longer the period before settlement. The reality is that premiums are far more cost effective, than foregoing cash or covering bridging finance costs.

 

When does the Deposit Bond terminate?

The Contract of Sale is completed.
When the Deposit Bond is called and the guarantor pays the Deposit Bond amount to the vendor; or
The Vendor terminates or rescinds the Contract of Sale.

 

What are the benefits of a Deposit Bond?

Cost savings. The funds, that would normally have been used as an up-front cash deposit, can remain invested, thereby earning extra interest; existing term deposits don’t have to be disturbed; or the need to apply for and secure bridging finance is avoided.

Convenience. Purchasers that are selling one property to buy another may have their money tied up as equity in their current property, and don’t readily have the 10% deposit to exchange the Contract of Sale.Deposit Bonds are a quick and convenient way to overcome this problem.

Auctions. Deposit Bonds can be issued prior to auction, which means the purchaser doesn’t have to worry about organising the deposit in a hurry. The Deposit Bond is issued, leaving the ‘property particulars’ section blank, meaning that if the purchaser is unsuccessful at one auction, the Deposit Bond can carry over to secure a property at a subsequent auction.

 

Are vendors willing to accept Deposit Bonds?

Deposit Bonds for residential real estate purchases have been available for many years and are widely used by the market, including leading financial institutions issuing their own co-branded Deposit Bonds in conjunction with various insurance company providers.

Deposit Bonds for commercial real estate purchases are a more recent option, so awareness amongst commercial real estate vendors is growing.

Ultimately, however, it’s the vendor’s discretion whether or not to accept a Deposit Bond.