The use of deposit bonds has grown steadily in popularity in Australia in recent years as they can be arranged relatively easily.
A deposit bond is used as an alternative to providing cash or other type of loans for a deposit on a property.
A deposit bond is very cost effective when compared to alternative arrangements.
Deposit Bonds may be used at auctions or by private treaty. A bond may also be used as a source of bridging finance. That is, you are not using your own cash for a specific period of time. Ideal when purchasing a property off-the plan as in some circumstances the term may exceed 36 months. There is no need for you to outlay any of your cash until you settle your property.
Obtaining a bond:
To exchange your contract of sale for your new property the bond value will always be equivalent to 10 per cent of the property purchase price.
The bond is issued by an insurance company. To obtain the bond you must complete a deposit bond application form and attaching a bank finance approval letter for the specific property you are purchasing as this will help the insurer to assesses the applicant prior to issuing the deposit bond.
Using a deposit bond should be used with caution. As using a bond is basically the same as having used your own cash. In the event that you cannot settle the property for whatever reason the vendor can claim the bond. Effectively, you can lose your 10 per cent deposit. The insurer will pay the bond proceeds if claimed upon. The insurer will then sue you for the bond value it had to pay out. Deposit bond insurers will usually demand such payments within 30 days of issuing a letter of demand.
On settlement of your property you must provide funds to cover the total purchase price in addition to your purchasing costs.
A deposit bond is used for a short period typically between the time you exchange the contract of sale and settling the property.
The deposit bond is basically only used to exchange the contract of sale by paying a once only premium. It is not intended to be claimed upon by the vendor. Once settlement has been finalised the deposit bond expires and cannot be claimed upon.