Beginners Guide to Deposit Bonds

If you've never heard about deposit bonds, this guide will get you across exactly what they are and how they might help you find your next property.

I Owe You note stuck on a fridge with a magnet.

Are you struggling to get access to a 10% cash deposit for your property purchase? You’re not alone.

Whether you’re a first home buyer, downsizing or investing, getting the deposit together is one of the major hurdles facing home buyers today. But more and more Australians are realising there’s a smart alternative to a cash deposit: a deposit bond.

In this post, we’ll cover what you need to know about deposit bonds, so you can decide whether it’s the right solution for you.

What is a deposit bond?

When buying property you will need to pay a cash deposit when signing the contract of sale for a property purchase, usually anywhere up to 10% of the purchase price. A deposit bond is used in place of this initial cash deposit - think of it as an IOU for the deposit amount you need to secure your property.

Just like a cash deposit, a deposit bond guarantees your commitment to an unconditional contract of sale. Then, at your settlement date you simply pay the full purchase price, including the deposit bond amount and any other costs, like stamp duty. This is typically achieved by obtaining finance (also known as a mortgage) through your chosen bank or lender.

The only money that is exchanging hands is the deposit bond fee, which you pay to the deposit bond provider upfront.

What it is not?

There can be confusion that a deposit bond can be used as a deposit to help secure finance from your bank or lender. That’s not the case.

A deposit bond can only be used as the initial deposit (up to a maximum of 10% of the purchase price), to guarantee your commitment to the Seller (also known as the Vendor) to the purchase of their real estate or land.

Why use a deposit bond?

Deposit bonds are a smart option if you want to purchase a property but don’t have ready access to a cash deposit - but you will by the time of settlement. You might be a first home buyer who is receiving a gift or selling an asset but don’t yet have the funds. Or you might be downsizing to a smaller property, but because you haven’t yet sold your current home, your cash deposit is still tied up.

3 facts to know about deposit bonds:

Fact 1: A deposit bond guarantees up to 10% of the purchase price

A deposit bond provider “guarantees” you for the deposit bond amount right up until you get the funds at settlement. In other words, it gives comfort to the vendor that you are committed to the sale. The most important thing is that you always check with the real estate agent, developer or vendor to make sure they will accept a deposit bond instead of a cash deposit.

Fact 2: You pay no interest

This is where a deposit bond can become really attractive. There’s no interest to pay on deposit bonds – you only pay the one-off fee just before your deposit bond is released. In most cases, this means a deposit bond is financially more advantageous than taking out a personal loan or redrawing to pay your home deposit.

Fact 3: Deposit bonds are very versatile

Deposit bonds can be used for lots of situations:

To buy a home, vacant land, commercial property and off the plan.
For settlements of less than six months or more than six months.
For regular private treaty sales and auctions.
Whether or not you currently hold finance approval from a bank or lender. If you don’t, you may still be eligible by assessing your income, assets and liabilities to verify that you will have the funds to settle on your purchase.

To find out more about deposit bonds and work out whether they’re the right option for you, talk to our team and we will be more than happy to help you establish the best path forward in your circumstance.