What is a deposit bond?
A deposit bond is a legal substitute for a cash deposit. It is like an insurance policy that acts as a guarantee to the vendor (also known as the seller) that the purchaser will pay the deposit at settlement.
“Deposit” refers to the required payment on exchange of contracts and “Bond” refers to an obligation to pay the sum.
How does it work?
No money actually changes hands until settlement, when the whole purchase price is paid to the Vendor and the deposit bond lapses.
The purchaser applies for the Bond, pays a one-off fee and must be able to prove that he or she will have sufficient funds available at settlement to complete the purchase.
What are the advantages of a deposit bond?
There are many reasons why a purchaser may want or need to utilise a deposit bond. They may have their funds tied up in term investment or in other properties. They may have sold their property and will not have the funds available until settlement of the sale of their property. Or the purchaser may be borrowing the full purchase price, in which case the funds won’t be available until settlement.
What will the bond issuer need from me?
The bond issuer will need to sight:
- a copy of the contract;
- evidence of the savings or funds in the term investment/bank accounts; and
- a copy of the unconditional loan approval or evidence of the sale of the property (depending on whether it has exchanged or not).
They may require a copy of the unconditional loan approval if the purchaser is borrowing the full purchase price.
How much does a deposit bond cost?
Provided the deposit bond is required to be valid for up to 6 months, the purchaser pays a one-off fee (usually about 1.3% of the deposit required) including the issue fee. For example, if a deposit is $80,000.00, the fee would be about $1040.00. The fee varies slightly between different Issuers.
The cost of the deposit bond depends on the amount of the deposit and the period you require the bond to be valid for.
Applications by purchasers who require a longer validity period (e.g. if they have an extended settlement period or are purchasing off the plan or purchasing unregistered land) are generally assessed on a case-to-case basis, depending on the purchaser’s needs.
Is a bond refunded if I don’t purchase the property?
If you return the bond to the issuer within 30 days from the issue date, you may be eligible for a refund of the fee you paid, less an administration and processing fee.
How does the vendor access the deposit if I don’t complete settlement?
If the purchaser defaults under the terms and conditions of the contract and the vendor becomes entitled to the deposit, the underwriter /bond provider is legally obligated to pay the vendor the deposit. The underwriter then is entitled to recover from the purchaser the deposit paid to the vendor.
What is an auction bond?
An auction bond may be issued to a purchaser who is attending an auction and is unsure of whether they will be the successful bidder. While the deposit bond amount is fixed, the vendor and property details can be left blank for the purchaser to complete if they are successful at the auction.
If the purchaser is not the successful bidder, the same bond may be used at another auction. The purchaser need not re-apply each time they wish to attend an auction. Alternatively, they may return the bond and obtain the refund less a processing and administration fee.
Do all sellers accept a deposit bond?
Whether you propose to use a deposit bond or an auction bond, your legal representative must seek the vendor’s instructions as to whether they will accept this method of deposit.
How do I apply for a deposit bond?
Most lenders and brokers should be able to assist you with arranging a deposit bond.
How can we help?
If your lender is unable to help you, contact us. For a modest fee, once you have given us the required documents, we will apply for a deposit bond on your behalf.
