What is a deposit bond?
When you sign a home loan contract you may need to pay up to 10% of the purchase price. But you may not have immediate access to your deposit funds if the sale of your existing home hasn’t settled or if you don’t want to pay a penalty for breaking a term investment. Generally deposit bonds are sourced through a lender or insurance company, and can be purchased for set periods. This may be as short as 3 or 6 months or longer for those clients who choose to purchase off the plan.
No money actually changes hands under the deposit bond. Instead, all purchase funds are paid at settlement.
In what situations are deposit bonds usually used?
Deposit bonds are useful for existing property owners who have equity in their home and wish to buy another property, investors keen on expanding their investment portfolios and first homebuyers looking to bridge the deposit gap. In general, whenever the deposit cannot be accessed until settlement, and you can prove you will have access to the deposit, a deposit bond can be used.
What are the benefits of a deposit Bond?
- expensive time delays and bridging finance can be avoided;
- savings remain intact, continuing to earn interest;
- you can purchase property ‘off the plan’, which typically offers longer settlement times;
- you can purchase at auction (be sure to inform the auctioneer first); and
- some deposit bonds can be used for up to four years.
How much do they cost?
Prices may be different depending on the bond company but at the very least you can expect to pay around a one-off fee of 1.2% of purchase price.
As an example if you were purchasing a home for $500,000 and needed a 10% deposit of $50,000 to exchange contracts, it would cost you approximately $600.00 to get a deposit bond in place.
Important note If you intend using a deposit bond, be upfront and seek the real estate agent and the vendor’s agreement beforehand. Check that deposit bonds are accepted by the vendor or real estate agent as sometimes vendors may want an early release of the deposit funds, so that they can in turn pay a deposit on another property.
Please contact Financing Hope for more information on deposit bonds.