What is a deposit guarantee?

In Australia, when a person enters into a contract to purchase residential property it is common practice for the purchaser to lodge a cash deposit of up to 10% of the purchase price with the vendor’s solicitor as security for the purchaser’s obligations. The deposit gives the vendor (the seller) a fund against which they can claim if you fail to complete the transaction. A deposit guarantee or also known as a “Deposit Bond” is a substitute for the cash deposit between signing contracts and settlement.

A deposit guarantee is a convenient way of securing a residential property purchase when funds are tied up. The guarantee that we organise is issued by “Lombard Insurance Company Limited” to the vendor for all or part of the deposit required. A deposit bond can be issued for all or part of the 10% deposit amount required. You can only apply for a deposit bond through us once you have a conditional approval “subject to just a valuation”. This means once your chosen lender verifies your recently signed contract of sale and then notifies us they’ve ordered a valuation on your new purchase, is when we will get you to complete and sign a two page application form for a deposit bond.

So, if you fail to complete the purchase of the property, the vendor or the holder of the deposit bond has the right to present the deposit bond to the insurer and claim the full amount of the deposit bond. The insurer will then seek reimbursement from you for any monies paid by it plus any other costs and expenses (because you have signed their ‘counter indemnity agreement’). In essence, a deposit bond enables you to defer your 10% deposit until settlement. The deposit bond is not a policy of insurance. It is a form of surety or guarantee.

Before you agree to purchase a property (or bid at an auction) you should check with the vendor that they accept deposit bonds instead of a cash deposit. You should also ensure that the vendor’s solicitor inserts the relevant clauses into the “contract for sale” to enable the deposit bond to replace the cash deposit.

Reasons why a deposit bond would be popular

  • Buyers that have no ready access to cash: Buying and selling at the same time, first home buyers short on the required 10% deposit, retirees downsizing are usually asset rich but cash poor.
  • More convenient to use a deposit bond: Property investors prefer to have their own cash working harder elsewhere, and for those that want to buy an off the plan purchase do not want to lose access to their cash.

Scenario

If you were buying a $450,000 property and the vendor insists on an upfront 10% deposit of $45,000, and you agree to provide only $15,000 once you receive your unconditional approval, then you can simply apply for a deposit bond for the difference – in this case, a $30,000 deposit bond.

Generally, you would apply for a deposit guarantee:

  • If you prefer to keep your savings earning interest right up until the day of settlement
  • If you have sold your current home but funds are not yet available for the deposit on your next property
  • If you are a first home buyer and don’t have the full 10% cash deposit required
  • If you do not want to pay the penalty for breaking a fixed investment or selling shares
  • If you are an investor and effectively borrowing 100% of the purchase price
  • If you may want to attend more than one auction before you decide which home to purchase
  • If you want a cheaper and quicker solution to arranging a deposit, than securing short term finance

It’s quick and easy:         You return a completed and signed double sided application form to us and the deposit bond will be issued within 48 hours to your Solicitor/Conveyancer, us and the vendor’s real estate agent.

It’s flexible:                       Deposit bonds can be used for private sales and auction purchases. Check with the vendor of the auctioned property if they will accept a deposit bond instead of cash or a cheque before you commence bidding, and in the case of a private sale, check with the vendor before you make an official written offer.

It’s cost effective:           It only costs a one off flat fee of 1.3% of the deposit bond amount that you’re applying for. In the example above, a deposit bond of $30,000 would therefore only cost you $390.

For even more information feel free to visit www.depositpower.com.au or simply call us to clarify what has just been explained.

About the author

Matt Carra

Matt Carra

Matt Carra is the Owner of Blue Key Finance, a Finance Broker since 2004, an SMSF Lending Specialist, a Property Investment Educator, and a Mentor to new Finance Brokers entering the finance industry. Matt is passionate about providing valuable guidance and honest advice, educating Australians on how to buy their first homes and invest successfully while protecting them with knowledge. Matt has strong long-term relationships with his panel of lenders and extensive knowledge on their credit policies, and utilises that skillset to give you peace of mind by recommending you to the right lender the first time, to negotiate a better deal, and to fight for your cause – that’s Matt’s commitment to you. Contact Matt today to start the conversation on 03 9700 7033 or email matt.carra@bluekeyfinance.com.au