If you don’t have the cash for a deposit to buy another property – then a deposit bond could be the answer.
Your broker can arrange deposit bonds for our mortgage clients as a complimentary service ie: we receive a small commission but we do not add any brokerage fee over the normal quoted price of the bond issuer. If you do not require finance or have finance arranged and you are not interested in allowing us to compete for your business, with your permission we are happy to pass your information directly to the bond issuer.
What is a Deposit Bond?
The seller of property takes a ‘deposit’ so that they will not be left ‘high and dry’ if you cannot pay for the property. But raising a deposit – say $40,000 – might not be very easy, especially at short notice.
A deposit bond provides another way of assuring the seller of your bona fides without the need to fund the full deposit. Instead of handing over 10% of the property’s value in cash, in effect you buy the seller of the property an insurance policy. If you don’t come up with the money, the insurance company will compensate the seller by paying them the 10% deposit. This secures the property for you until settlement.
Who uses Deposit Bonds?
Deposit Bonds can be useful for property buyers in various situations including:
- People buying a property off the plan.
- Purchasers waiting for funds to come through from another source.
- Investors who have equity in their home but no liquid assets.
- People wishing to bid at auctions.
Types of Deposit Bonds
Through Peach Home Loans, you can apply for 3 different kinds of deposit bond, all of which have different features and prices:
1. A short term bond issued on approval from a lender.
This deposit bond requires minimal documentation, as it ‘piggy backs’ on the lender’s approval process. (Unconditional approval is generally required, though if you are buying at auction an approval subject to valuation only is usually acceptable.) These bonds have the lowest costs and have up to 12 months validity.
2. A long term bond not requiring approval from a lender.
Bonds extending over 6 months are long term. Because there is no lender’s approval on which to piggy back, applying for this kind of bond is more involved and the paperwork involved is similar to that involved in applying for a loan. Because of the additional work in assessing the application, this type of bond is more expensive. Such bonds can be valid for up to 48 months. You are required to hold existing property assets with clear equity equal to at least 4 times the value of the bond
3. A “low docs” deposit bond.
This bond is secured on available equity in existing property of yours. You can self certify your income and you only need to provide documentation showing:
- your identity;
- the Capital Improved Value for your property being offered as security – from council rates notices;
- your repayment history on your existing mortgage if you have one; and
- the Particulars of Sale page from the purchase contract
To check whether you would qualify, just add the amount of the bond to the outstanding loan balance on your property offered as security. If the total is less than 80 per cent of the value of the property offered as security, your application fits the guidelines and will be favourably considered for approval.
Remember that even if a deposit bond has been issued to you this is no guarantee that a loan will be approved.