What is a Deposit Bond in Australia and How Does It Work?

Deposit Bond in Australia

Are you looking to buy a property, but you don’t have enough cash for a deposit? You can consider a deposit bond in Australia as an alternative. Basically, a deposit bond is viewed as an insurance policy that functions as a guarantee to the seller, assuring them that the buyer will make the deposit payment upon settlement.

What is a Deposit Bond in Australia?

When purchasing a property, purchasers have to give a cash deposit. Usually, a cash deposit is up to 10% of the purchase price. A deposit bond, regarded as a financial agreement, emerges as an alternative to a traditional deposit in the context of property sales, typically when a buyer and seller enter into contractual agreements. However, if the buyer couldn’t provide the necessary funds at the time of settlement, the seller is able to claim the deposit bond from the provider of the bond.

How Does a Deposit Bond Work?

For beginners, if you are looking to buy a home, you need to apply for a deposit bond with a bond provider. Generally, the bond provider will get details about your financial status, check your credit score, and purchase contract terms. The primary goal is to make sure you have enough funds, for instance, the First Homeowners Grant to complete the purchase at the time of settlement.

If the lender or bank has referred you, the issuer may use details provided by the bank. After your application approval, a bond will guarantee the deposit amount that will be given to your seller. They will keep the bond until the settlement is done and claim the deposit bond only if you are not able to pay the deposit by settlement time.

Why Use a Deposit Bond?

While deposit bonds are for those who don’t have enough cash for a deposit and there are various reasons why you should opt for a deposit bond.

  • No need for available cash

A deposit bond prevents you from paying from your savings to access cash if you don’t have liquid funds. For instance, when you have savings in your equity, and you are looking for a settlement, i.e. you have already sold your property, yet a deposit is not available to pay the deposit for the new property/home. Similarly, the deposit bond is the right alternative that helps avoid additional costs, penalties, and other upfront costs when you break your fixed-term investment.

  • More Affordable

Deposit bonds are more affordable than other borrowing options. You’ll need to pay a small one-off fee to the bond provider. This is negligible as compared to recurring interest payments on a loan.

  • Flexibility

Deposit bonds are customised according to the requirements, such as the settlement date, yet can be used to buy various types of properties. By utilising deposit bonds, you have the option to purchase off-the-plan properties while also benefiting from an extended settlement period.

  • Appropriate for Auction Properties

You can take advantage of deposit bonds when bidding at auction, also called auction bonds. If at your first auction, you have an unsuccessful bid, you can reuse the bond at other auctions. In addition to this, if you return the unused auction bonds within 30 days of being issued, you may apply for a refund.

  • Increase Interest Earned on Savings

As you are aware, when using a deposit bond, there is no need for immediate cash payment upfront. This allows your savings to remain untouched, enabling you to continue accruing interest while awaiting the settlement.

Risks of a Deposit Bond

There are some risks involved with deposit bonds.Here are several factors you should consider:

  • Some vendors may not accept deposit bonds as they may be selling the property for liquidity purposes.
  • Certain agreement terms may indicate that a cash deposit is mandatory.
  • A real estate agent may refuse deposit bonds as they are paid from the deposit and the bond use won’t allow for the release of their commission.
  • The applicants have to show that they are financially strong to pay the deposit.

The blog shares detailed information regarding a deposit bond and how do deposit bonds work along with the benefits and risks associated with a deposit bond. For further information on deposit bonds, you can get in touch with Home Star Homeloans.

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