What is a Deposit Bond?
ENAYBL Deposit Bond Solutions
If you’re looking to buy a property, you may have heard of a Deposit Bond but thought ‘what is a Deposit Bond?’. A Deposit Bond can be used instead of a cash deposit when purchasing a property. As the buyer, you are required to pay the vendor a cash deposit, pending completion, to secure your property purchase. Instead of the buyer paying a 10% cash deposit, a Deposit Bond is used as an alternative.
Understanding What is a Deposit Bond
A Deposit Bond, sometimes referred to as a Deposit Guarantee, is similar to a bank guarantee issued by a bank, except a Deposit Bond is issued by an insurance company.
If you’re still wondering ‘what is a deposit bond?’, it’s essential to understand that using one doesn’t negate the buyer’s obligation to pay the 10% of the property price. The use of a Deposit Bond simply delays the ten percent payment until the sale is complete.
To explain further, usually, if a buyer wants to purchase a property, on the market for $800,000, they pay a cash deposit of $80,000. Then, when they complete the sale, they pay the vendor the balance of the property price, in this case: $720,000.
Alternatively, the buyer can purchase a Deposit Bond, and use this Deposit Bond, in place of the usual cash deposit, to commit to the sale of the property. They do this by sending the Deposit Bond to the seller, or the seller’s legal representative, who retains the Deposit Bond in lieu of the deposit, pending completion of the sale. As the buyer has not paid a cash deposit, when they complete the property purchase, they have to pay the full purchase price – $800,000 in this instance.
Why Do Buyers Choose a Deposit Bond?
If you’ve ever asked yourself ‘what is a deposit bond and why should I consider it?’, here are some reasons:
A Deposit Bond is quick and easy to organise
A Deposit Bond does not tie up their wealth and assets
A Deposit Bond is very cost effective
Generally, buyers don’t have readily available cash just sitting in their bank account to pay the cash deposit on their property purchase. Instead, they have their wealth locked up in the equity they have in their home, invested in a term-deposit, shares, or a superannuation account; earning them a good return. So, to come up with a cash deposit, they may well have to liquidate these existing assets, or organise a loan against their family home. The process of liquidating assets takes a considerable length of time, and can result in lost earnings on investments, or unnecessary interest payments on a loan. Furthermore, organising a loan can take weeks, if not months – as does arranging a bank guarantee for the necessary cash.
On the other hand, a Deposit Bond takes just hours to approve, once the buyer’s application has been submitted, and the fee has been paid.
What is the Fee for a Deposit Bond?
The cost of a Short-Term Deposit Bond, for a period of up to six months, is 1.3% of the deposit amount.
For a Long-Term Deposit Bond, that can be used to secure an un-registered property purchased off the plan, the fee is approximately 3% per annum of the deposit amount.
So, when compared to the cost of borrowing money from a bank for a deposit, which in 2023 is currently over 5% per annum, it makes great financial sense to use a Deposit Bond to secure a property purchase.
Who Can Benefit from a Deposit Bond
Up Sizers
There comes a point in time when you outgrow your current home, almost invariably, this is due to a growing family. You might be living in an apartment, and now, with a growing family, the kids need their own room, and a back yard to play in. The bottom line is your current home is no longer fit for purpose.
In many cases, you have been able to build up equity in the home you have owned for a number of years. However, accessing that equity to put a deposit on a new home can take time and will come with a cost – the cost of borrowing money. Even if you have sold your existing property, or have agreed to terms with a potential buyer, your funds will not be immediately available to pay a deposit and secure your dream property – should you find it before the sale is settled.
Does this sound like you? An ENAYBL Deposit Bond is the quick and cost-effective solution to the problem of accessing your wealth in a hurry and can help you secure your new family home.
Down Sizers
Now, at last, the family is off your hands, and you no longer need a four-bedroom home, with a big back yard. It’s time to downsize and move to property that is less costly, and time consuming to look after. After all – you want to get out and about now, and enjoy life!
However, the challenge you face is coming up with the deposit for a new property purchase when your wealth is tied up as equity in your current property, or invested in shares, or your superannuation fund, where it’s earning you a good return. Liquidating your investments in a hurry could result in a tax liability, or loss of earnings……or both!! So, down sizer Deposit Bond is the logical solution.
To qualify for a down sizer Deposit Bond you simply need to have a specified amount of equity in your current home. It’s that simple.
First Home Buyers
It can take eight years to save your deposit for a new home, and if you’ve saved the full ten percent cash deposit – then you don’t need us!
However, most first home buyers have a family pledge loan approved, but no cash deposit, or have saved a five percent deposit, and have a loan approved for ninety five percent of the property price. In both cases, the vendor will, more than likely, want the usual ten percent deposit from the buyer. If this is you – you do need us!
If you are a first home buyer with a family pledge loan, and the full funds are not available until settlement, and you have to pay a deposit to commit to buying the property at exchange, or when contracts go unconditional. In this case, you can solve this dilemma quickly and easily with a Deposit Bond.
Property Investors
Property investors can use the equity in their home to borrow a hundred percent of the purchase price of an investment property. This could be to leverage the equity in their current property, or for positive tax concessions. So, when the time comes to pay the deposit on a future investment property, to save paying a cash deposit, or re-drawing on the equity in their home, it makes excellent financial sense for an investor to use a Deposit Bond. This is because the Deposit Bond delays the need for a full cash payment until completion of the sale. So, the use of a Deposit Bond streamlines and simplifies the process of closing the sale for the investor.
