What is a deposit bond?
A deposit bond can be used instead of a cash deposit when you sign a contract to buy a property. The bond guarantees that the deposit amount will be paid in full at settlement, and if you don’t pay the deposit or renege on the contract, the seller can claim the full bond.
Deposit bonds are often used by buyers who haven’t sold their current home yet, but they could be useful for anyone with the means to buy property but without ready access to cash.
How does a deposit bond work?
Deposit bonds are usually issued by insurance companies. You apply for a bond, pay a fee, and the issuer provides the bond for the seller, formalised with the sale contract. If you default on the contract and the seller is eligible to keep the deposit, the bond issuer will pay the seller.
In such cases, you still owe the full amount and will have to pay it back to the issuer eventually.
Deposit bond terms (how long the bond is valid for) vary based on the product. Short term bonds are usually up to six months, but some lenders also offer long term bonds (for extended settlements and off-the-plan properties) that are valid for several years.
How do I get a deposit bond?
To get a deposit bond you need to demonstrate to the issuer that you’ll be able to pay up when the time comes. You might have to provide your pre-approval letter, proof of savings or an asset you plan to sell, or show you have enough equity in your current property to cover the bond amount.
While time frames can vary between providers, it generally shouldn’t take more than a couple of days to receive your bond. In fact, some advertise a turnaround time of just a few hours.
How much does a deposit bond cost?
Deposit bond fees are generally calculated as a percentage of the bond amount. Between 1% and 2% is common for short term bonds, but longer terms may be more expensive.
Before you choose which provider to go with, it’s a good idea to compare the cost, as you might find some are cheaper than others (but always check the terms to see exactly what you’re getting).
Should I get a deposit bond?
Deposit bond pros
There are a few possible advantages to using a deposit bond instead of just paying the deposit right away:
- Get into the market sooner: Using a deposit bond could help you buy property sooner than you otherwise could’ve if you waited for an asset to sell or an upcoming cash windfall. If property prices are appreciating, this could mean saving on the purchase price.
- Free up cash: Some buyers use deposit bonds even though they have the cash on hand, often because they want to invest their money instead. This may particularly be the case if there’s a long time until a property’s settlement day, as they might be able to generate a return on their savings that outweighs the cost of the bond.
- Buy your new home before you sell the old one: Deposit bonds can make it easier to move houses, ensuring you don’t end up selling your old home before settling the new one and end up with nowhere to live in the meantime.
Deposit bond cons
On the other hand, there are also a couple of drawbacks to deposit bonds:
- More expensive: The bond fee means you might end up paying more than you would have using cash up front.
- Not accepted by all vendors: Some sellers might specify you can’t use a bond deposit, often if they’re relying on the deposit to buy themselves.
Alternatives to deposit bonds
If you’re looking to buy but you haven’t got much of a deposit on hand, there are a few other options you could consider besides a deposit bond:
