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If you don't currently have the cash or don't want to use your cash for a property deposit, then a deposit bond could be the answer you are looking for.
Frequently Asked Questions
What is a deposit bond?
Why use a deposit bond?
Who can use a deposit bond?
What types of deposit bond are available?
What is the length of a deposit bond?
How much do deposit bonds cost?
What are the approval guidelines?
What is a counter indemnity?
Does the purchaser still have to pay the deposit amount at settlement?
What happens if I need to extend the deposit bond term or expiry date?
When does the deposit bond terminate?
Is any security required to get a deposit bond?
What happens if I don't go through with the sale?
What happens if the vendor and purchaser are in dispute, can the vendor still claim on the deposit bond?
What documents are required to get a deposit bond?
A deposit bond has been issued. Is this a guarantee that I will get a loan at settlement?
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What is a Deposit Bond?
Deposit Bonds are a simple, efficient and inexpensive alternative to cash when providing a deposit for a property purchase. It acts as a substitute for a cash deposit until the property settlement occurs.
When a person buys a property the seller requires an upfront deposit so that if the purchaser doesn't go through with the purchase they will not be left out of pocket. The initial deposit is usually 10% of the purchase price (but can be negotiated to any amount). If the deposit is $45,000 for example, and the purchaser has their money tied up in the share market, or a term deposit or are waiting for the proceeds from a property sale or simply doesn't wish to use any cash, a deposit bond is the perfect answer.
A deposit bond is a guarantee from an insurance company which acts as an interim substitute for a cash deposit. This secures the property for you until settlement.
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Why use a Deposit Bond?
By using a deposit bond you no longer need to cash in your shares or term deposit or refinance your house, in order to come up with a deposit on a property. A deposit bond allows you to pay the full price of the property at settlement. Some of the significant benefits of using deposit bonds are:
Cost Savings: the cash funds that would normally be used as an upfront cash deposit can now remain invested thereby earning you extra interest or returns. In some circumstances this could mean not having to refinance your house or take out a personal loan for the deposit, which saves you money instantly.
Simplicity: You may find a property when you least expect it, therefore making it difficult to access funds from a term deposit or equity in your house at short notice. A deposit bond is a much simpler way of paying for the deposit.
Convenience: If you have bought a house before your current house is sold, you may not have the 10% deposit available. Deposits bonds are a very quick and convenient way to overcome this issue.
Auctions: Deposit bonds are commonly issued before auctions allowing you to know your maximum purchase price along with having the deposit ready on the day. If you are not successful at the first auction, the deposit bond is still valid for future auctions.
Guarantee: Major insurance companies issue deposit bonds and these companies guarantee payment to the vendor. This guarantee cannot be cancelled once the bond has been issued.
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Who can use a deposit bond?
Property purchasers can use deposit bonds in the following ways:
- First Home Buyers.
- People who have purchased a property settling in 30 days or more.
- People who have bought a property "Off the Plan", meaning the property is not built and may take anywhere from 6 months to 4 years to complete (part of a high rise).
- People who are waiting for their own property to settle to gain access to funds.
- Investors who have a lot of equity but not much liquid cash available.
- People wishing to bid at property auctions.
- People wishing to purchase either a residential or commercial property.
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What types of Deposit Bonds are available?
There are three main types of deposit bonds:
A deposit bond issued on approval from a lender -
The initial step is to seek a pre-approval from a lender who will assess the person's ability to purchase the property. Once the pre-approval is obtained it is forwarded to the deposit bond issuer with other documentation. The bonds are generally for terms up to 6 months. This is the cheapest form of deposit bond (because the length of the bond is the shortest).
A deposit bond not requiring approval from a lender -
These bonds are generally for settlements greater than 6 months whereby a lender's approval letter would be meaningless anyway. The property could settle up to 5 years later in the case of a massive project development. The application process for these bonds is very similar to a normal home loan application because at the end of the day the deposit bond company must be comfortable that you can settle the property and then afford to repay the loan come settlement time. These bonds are more expensive as the timeframes are longer and hence the risk for the insurer is greater.
A low document deposit bond -
The deposit bond is approved based on your current asset and liability position and a stated income position that you certify. Some bond companies will use the equity in your house to secure the low document deposit bond, due to the added risk. Low Document deposit bonds are the most expensive form of deposit bonds.
A quick method to check whether you qualify for a low document deposit bond is to add the amount of the deposit bond to the outstanding loan balance of the mortgage against your house. If the total is less than 80 percent of the value of your house, your application should fit the guidelines of the bond company and will be considered.
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What is the length of a Deposit Bond?
Deposit bonds range from one month up to a maximum of 60 months. The term of the deposit bond is based upon the sunset clause which is found in the contract of sale. The sunset clause is the maximum amount of time the developer/builder has to build the property allowing for rain delays, union problems, council problems etc. If the property is not completed by the date set out in the sunset clause the developer and the applicant both have the right to rescind the contract, i.e. walk away. This could work in the favour of the applicant if they are not able to settle the property or the market has declined and they do not want to settle the property. However, it could be a disadvantage to the applicant if the value of the property has increased over the construction period and the developer decides to rescind the contract and resell the property for a higher price (with the applicant missing out on the capital growth of the property). This is one of the risks in purchasing off the plan properties.
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How much do deposit bonds cost?
The longer the bond the more expensive it becomes. Deposit bonds have a once only upfront premium, there are no ongoing costs or termination costs. If a bond needs to be extended then an additional premium will need to be paid. Premiums vary between the different bond providers. Loans Australia has access to all the major Australian deposit bond providers.
To obtain a costing for your particular situation please fill in the application form or contact us.
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What are the approval guidelines?
For short term bonds under 6 months a lenders approval must be in place.
For bonds longer than 6 months the applicant(s) must be able to demonstrate a minimum of five (5) times the value of the deposit bond in Approved Equity.
Only approved assets (as deemed by the bond issuer) can be used to assess the five times equity rule.
Applicants must clearly be able to demonstrate their ability to settle the purchase.
Applicants must be able to demonstrate satisfactory income to support all current and future borrowings.
There is a maximum of $160,000 per deposit bond, but larger amounts will be considered.
Deposit bonds can be used for both residential and commercial property.
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What is a counter indemnity?
The applicants must sign a counter indemnity before a bond is issued. The insurer provides the deposit bond on the understanding that the applicant will pay the seller/vendor the full amount on the settlement date of the contract. The counter indemnity is the legally binding right the applicant gives to the insurer to pursue recovery against the applicant for any part of the bond amount the insurer must pay to the seller, if the applicant defaults under the contract.
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Does the purchaser still have to pay the deposit amount at settlement?
Yes. The bond is a substitute for the cash deposit stated in the contract of sale. It does not remove your obligation to pay this deposit to the vendor at the contract settlement date.
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What happens if I need to extend the Deposit Bond term or expiry date?
Generally the deposit bond company will want to see a letter from the sellers/vendors solicitor outlining how long the extension is required for. A further premium will need to be paid. The bond company could reassess the situation and ask for updated financial information.
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When does the deposit bond terminate?
The bond terminates when the contract of sale completes or the deposit bond expires. The bond also terminates when the insurance company pays a claim, or the seller/vendor terminates or rescinds the contract.
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Is any security required to get a deposit bond?
Most deposit bond companies require no security before issuing a deposit bond, and therefore they are an unsecured facility. This makes deposit bonds very quick to be issued, in most cases bonds are issued within 48 hours of the company receiving the required paperwork.
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What happens if I don't go through with the sale?
If you do not complete the settlement of the property, the seller/vendor can claim the deposit amount from the deposit bond insurer. The insurer will then seek to recover the deposit amount plus legal costs from you under the counter indemnity. This could involve legal action if you do not pay.
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What happens if the vendor and purchaser are in dispute, can the vendor still claim on the deposit bond?
A deposit bond is an unconditional guarantee by the deposit bond insurer to the vendor to pay the face value of the deposit bond. As long as the contract has not been terminated and is still valid the vendor can still claim under the deposit bond. The dispute is a separate issue and must be resolved separately.
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What documents are required to get a deposit bond?
With a Loan Approval:
- Application form completed.
- Copy of loan approval.
- Copy of contract of sale.
- Evidence of funds to complete purchase e.g. property, shares, managed funds, cash etc.
- 100 points of identification e.g. passport or birth certificate (70) and drivers license (40).
- If sale proceeds are being used to complete the purchase, fully exchanged contract of sale on property sold to be provided.
Without a Loan Approval:
- Application form completed.
- Copy of contract of sale.
- Rates notice on current properties.
- Most recent loan statement on each property.
- Property valuation (can be a letter from a real estate agent).
- Evidence of funds to complete purchase e.g. property, shares, managed funds, cash etc.
- 100 points of identification e.g. passport or birth certificate (70) and drivers license (40).
- If sale proceeds are being used to complete purchase, fully exchanged contract of sale on property sold to be provided.
- Financials: If PAYG, then a recent payslip and last year's tax return, group certificate or tax assessment notice. If self-employed then the last 2 years personal and business returns should be required.
- Current rental income statement for all investment properties.
- Copy of last superannuation statement if the applicant is over 55.
Guarantors - If there is a joint owner of any of the applicant's assets being used for the deposit bond assessment, the applicant will most likely need that second party to go as guarantor if the equity is to be considered under the application.
Trust Applications - Trust applications are acceptable by most deposit bond companies. A copy of the trust deed must be supplied with the application. There will be an additional fee to cover the additional legal requirements involved with trusts.
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A deposit bond has been issued. Is this a guarantee that I will get a loan at settlement?
No. There are no guarantees of a loan being approved at settlement. Your personal circumstances could have changed dramatically from deposit bond approval to property settlement. It is advisable to start the finance process at least 10-12 weeks out from settlement to ensure you can settle the property on time.
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APPLY for a Deposit Bond.
By filling in the Deposit Bond Pre-Approval Form, Loans Australia will quickly assess your ability to be approved for a bond. We will also be able to look at the maximum number of bonds that you might be able to afford.
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