If you’re in a rush to secure a property and it’s a tight squeeze to raise the necessary deposit in time, you could get it done by purchasing a deposit bond.
A deposit bond is a substitute for the deposit required when purchasing property. It’s basically an insurance policy. No money actually changes hands, but instead all purchase funds are paid at settlement.
A guarantee is provided by the insurer to the vendor on the understanding that the purchaser will pay the full purchase amount on the day the property settles.
When applying for a deposit bond the purchaser will sign a counter indemnity agreement to confirm this.
Under the counter indemnity agreement the purchaser gives a legally binding right to pursue recovery against the purchaser for the deposit bond amount that the insurer pays the vendor, if the purchaser defaults on the loan.
The deposit bond is for the vendor’s benefit only. If the insurer ends up having to pay the vendor for the bond amount they will look to the purchaser for recovery of that amount. The purchaser remains responsible for the completion of the contract, including the costs and penalties for defaulting. The deposit bond is simply a means by which the vendor can be assured that a sale to the purchaser with the deposit bond is safe.
So for just a few hundred dollars you can secure a property with no other cash, leaving your savings and investments as they are. Deposit bonds can be approved quickly and are especially effective to buy ‘off the plan’ properties and at auctions.
Most vendors will accept a deposit bond but they are not obligated to do so. This being the case, it is absolutely essential you get prior consent before using them at auction.
Common types of Deposit Bonds
Deposit bond on loan approval
- Follow up on lender’s home loan approval process.
- Usually require unconditional loan approval (in the case of auctions approval subject to valuation is usually acceptable).
- Have the lowest costs and valid up to 12 months.
Deposit bond not requiring lender approval
- Not attached to lender’s loan approval process.
- Application more involved/more paperwork.
- More expensive.
- Can be valid for up to 4 years.
“Low Docs” deposit bond
- Secured on available equity in the purchaser’s existing property.