Deposit Bonds: what are they and why use them?

Launch Finance I Deposit Bonds. What are they and why use them.

It is common practice in Australia that when purchasing a residential property, a 10-20% deposit may be required to secure the sale. The deposit is then held in trust by the seller’s solicitor or settlement agent as security for the purchaser’s obligations. In some cases, when the purchaser does not have the full deposit available in cash, a deposit bond can be useful.

What is a Deposit Bond?

A deposit bond is essentially an insurance policy for the deposit that acts as a guarantee of the commitment of a buyer to the contract of sale. It provides a convenient option for purchasing a property without needing to source a large cash deposit.  Your client may have the cash funds available, but perhaps their cash is working harder for them in their offset account than in a trust account awaiting settlement.  An insurer issues the deposit bond in favour of the vendor for all or part of the deposit required. 

What happens if the purchaser does not complete the purchase?

If for any reason the purchaser is unable to meet their obligations under the contract of sale, the seller or the holder of the deposit bond has the right to claim the value of the deposit bond from the insurer.  The insurer may then look to recover the monies paid to the vendor from the purchaser in addition to any other costs and expenses incurred. The purchaser remains responsible for completion of the contract, including the payment of any costs and penalties associated with a default. 

A deposit bond, in essence, enables the purchaser to wait until settlement of their current property to provide full cash payment (including the deposit) for the purchase of their new property.

Case Study

At Launch Finance, we recently assisted a couple finance a $2 million property purchase on the east coast of Australia using a 10% deposit bond. At the time, the deposit for the new property was tied up in their existing home that had recently been sold but had not yet settled. As the two properties were expected to settle concurrently, our broker suggested the use of a deposit bond.

The process of obtaining a deposit bond was incredibly simple and completed with 48 hours. The application was online requiring only a few personal details, contract of sale and a $1,576 fee. As a result, our very happy clients were able to simultaneously secure the purchase of their dream home while waiting for settlement of their current home.

If any of your clients are looking for a finance solution where a deposit bond may be of benefit to them, your broker will be happy to assist and advise during a free consult. Call (08) 9367 4222 or fill out the form on this page.

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