The Australian property market has been in strong demand across most major capital cities over the past 6 – 12 months, and this is showing little signs of slowing down in the short term. With many properties being sold above their asking price, particularly where auctions are involved, what steps should you take to prepare for an auction and how can a deposit bond help.

A deposit bond, which can also be called a deposit guarantee, is effectively a substitute for cash when covering the required deposit following the purchase of a property. This provides the seller, or vendor, with some assurance that the buyer will be able to cover the deposit when it comes to settlement.

This week we’re exploring how a deposit bond can help, how you can go about securing one, what it costs, and what are the pros and cons of using a deposit bond rather than simply using your cash in the bank.

Let’s start with the basics

A deposit bond is a guarantee that allows you to use the bond instead of cash to cover the required 5 – 10% deposit when you purchase a property and exchange contracts, instead of using your own cash. This means that the vendor can claim the deposit guarantee or bond from the provider or if the buyer fails to proceed with the purchase at settlement.

In the case of an auction, they are often referred to as auction bonds, which are similar to a deposit bond; however, they would not include the property's details given that the auction is yet to take place. Many properties will require a 5% deposit if the property is secured at auction, so this is where an auction bond can come in handy.

How does a buyer secure a deposit bond?

Deposit bonds are issued by specialist providers such as DepositAssure and DepositPower. In order to obtain a deposit bond, the prospective buyer will provide details of the property if possible, as well as any pre-approval confirmation with the bank. This would include proof that the buyer has funds available to complete the purchase of the property, which could be in the form of liquid assets or cash in the bank.

Other documents and information that could be required to secure a deposit bond include the following:

• Formal loan approval.
• Copy of the property contract where possible.
• Evidence of the funds available to complete the settlement.

How much does a deposit bond cost?

The cost of deposit bonds is relatively well standardised across the industry and is often a one-off fee of 1.3% of the deposit bond amount required. The bond could be valid for anywhere from 3 months, right up to 48 months where required, although in most instances this would be 3 – 6 months.

To illustrate how the cost of the bond is calculated, consider that you’re looking to purchase a property for $500,000, and require a 5% deposit to secure the property. This would equate to $25,000, and the fee for the deposit bond would therefore be calculated as follows:

$25,000 x 1.3% = $325.00

What are the benefits of using a deposit bond?

There are many benefits to using a deposit bond, which we’ve outlined below:

• This avoids you having to dip into your cash savings or sell your liquid assets until you’re required to for settlement.
• The assets that you intend to liquidate for settlement may currently be frozen or locked up and you’ll face penalties for selling them early.
• The turnaround time for the pre-approval is much longer and securing a deposit bond can often be achieved within 24 – 48 hours.
• The fee for the bond is only payable once, and not for the property that you’re looking to bid on.
• This is often a cheaper option than a bridging loan, particularly if you’re looking to sell and purchase properties at the same time.
• This may allow you to get into the market faster.

What are the drawbacks to using a deposit bond?

There are a few notes of caution that you need to consider when it comes to utilising a deposit bond, which we’ve outlined below:

• It does involve the prospective buyer going through a health check with the deposit bond provider, which would need to be passed before the guarantee was approved.
• Funds are still required at settlement, so it doesn’t avoid the need to use cash altogether.
• Some vendors or property agents may not accept a deposit bond, so it’s important to ask the question, particularly if you’re attending an auction.

What should I do if I want to consider a deposit bond?

If you’re looking to purchase a property, and you’re wondering if a deposit bond is a suitable option for you, reach out to our team at Loansuite and we’d be happy to explore your options. We work with all of the major deposit bond providers and walk you through the process to get this into place for you.

Ally Home Loans Pty Ltd is your ally in finance for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.

Book an obligation-free, complimentary consultation here today.

Ally Home Loans Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.