What is a Deposit Bond
In Australia when a person or entity 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 Bond is an instrument that, by agreement with the vendor, can replace the need for a cash deposit. It is a convenient way of purchasing a property without the need to arrange a large cash deposit or immediately cashing in or selling an investment that may mature at some point in the future. The Deposit Bond is issued by an insurer to the vendor for all or part of the deposit required.
If the purchaser fails to complete the purchase of the property and has used a Deposit Bond, 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 the purchaser for any monies paid by it plus any other costs and expenses.
In essence, a Deposit Bond enables the purchaser to defer until settlement of their 10% deposit.
A Deposit Bond is NOT a policy of insurance. It is a form of surety or guarantee.
Why are Deposit Bonds so popular?
A Deposit Bond can be a quick and efficient way of arranging the deposit for the purchase of a residential property. Arranging a cash deposit may take time, especially if the purchaser has not sold their current property or needs to sell investments to raise the required deposit.
Deposit Bonds enable purchasers, whether they be investors or otherwise, to avail themselves of opportunities as and when they arise.
Who can use a Deposit Bond?
The product is suitable for virtually anyone contemplating the purchase of a residential property including:
- future home buyers;
- home owners upgrading to a new property;
- investors wishing to purchase property or additional properties;
- owners or investors wishing to purchase properties off the plan.
The product is especially convenient for investors who may have funds tied up in non-liquid assets and who wish to purchase properties when opportunities arise. Finding the 5% or 10% required to enter into a contract on another property may be difficult when investment opportunities arise at short notice. Arranging bank finance or short-term loans may take time and associated costs may be high.