If you don’t have cash on hand or do not want to use your funds to pay the needed deposit for an investment property. Take advantage of deposit bonds. Here is how -
What is a deposit bond?
A deposit bond is a financial product that provides an alternative to paying a cash deposit when purchasing a property. It enables purchasers to use the funds available for other costs associated with buying a house, such as legal fees or stamp duty.
It can benefit first-home buyers who may need more funds to cover the deposit and related expenses.
A deposit bond in Australia guarantees the seller that the purchaser will fulfil their contractual obligations concerning completing the property purchase.
This means if the buyer cannot complete the purchase for any reason, they are still liable to pay the agreed amount as outlined in the contract.
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How do deposit bonds work?
Deposit bonds are issued by a financial institution and guarantee the agreed deposit amount to the seller if the purchaser cannot complete the purchase.
This means the liability for the deposit still falls to the purchaser, but they are no longer required to pay it upfront.
The bond is typically for a set period and is paid for by the buyer. The financial institution will then place the deposit amount in a trust account until the sale is completed or the bond expires.
The deposit amount is released to the purchaser if the sale does not go ahead.
Deposit bonds are available in Australia from various financial institutions, though terms and conditions may vary.
It is essential to read the details of the product to understand your obligations and rights before applying for a deposit bond.
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Benefits of the deposit bond
- A deposit bond can be a cheaper alternative to bridging finance and gives you peace of mind that the new property will be held for you until you sell your own property.
- Secures the property you want to buy faster than a cash deposit, which can take time to set up.
- When financing 80–100% of the purchase price, deposit bonds allow investors to defer cash deposit payment until settlement.
- Deposit bonds allow investors to buy most residential and commercial property.
- Allows you to save money and earn interest till settlement.
- Deposit bond applications are processed within 24 hours.
Risks of a deposit bond
Risks of a deposit bond include:
- The purchaser is still liable to pay the agreed amount as outlined in the contract, regardless of the outcome of the sale.
- The financial institution may not reimburse the deposit amount in full if there are delays in the sale process.
- The bond may expire before the sale is completed, and any unused deposit portion will not be refunded.
How long does a deposit bond approval take?
After submitting an application and payment, a deposit bond can be authorised and made available on a contract of sale in a few hours.
Depending on the complexity of the application, the processing time for a deposit bond might range from four to forty-eight hours.
Who can apply for a deposit bond?
Anyone looking to purchase a residential or commercial property can apply for a deposit bond. Eligible entities include -
- Trusts
- Self-managed super funds
- Permanent residents of Australia
- Partnerships
- Registered business entities.
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