If you are purchasing a residential property, and you don’t have your deposit readily available, then a deposit bond may be your answer. A deposit bond is a guarantee to the vendor, by an insurance company, that they will receive their 10% deposit, even if the purchaser defaults on the contract of sale. You, the purchaser, are able to provide this guarantee to the vendor by paying a small premium to the insurance company.
Some examples of instances where a deposit bond can be used are:
- Where you are selling one property and purchasing another and you don’t have a cash deposit
- You need a 10% deposit, but you only have a 5% deposit and you have been approved for a home loan of 95% of the purchase price
- You are borrowing 100% of the purchase price of a property using equity in another property and you don’t have the cash available to use as a deposit
- You have a deposit available but it is tied up in shares or managed funds that you don’t wish to liquidate immediately
Upon settlement of the purchase, you, the purchaser, are still required to pay the full purchase price of the property, including the 10% deposit. The purpose of a deposit bond is not to pay the deposit but to guarantee to the vendor that it will be paid. If a purchaser reneges on the contract of sale and is still required to pay the deposit, the vendor can claim the money from the insurance company who issued the deposit bond. The insurance company will then recover the money from the purchaser.
Mortgage World Australia offers short term deposit bonds for settlement periods up to 6 months and long term deposit bonds for settlement periods between 6 and 48 months. Long term deposit bonds are generally used for the purchase of off the plan properties.