Unraveling the Mystery: How and When Can a Deposit Bond Benefit Your Real Estate Transaction?

In the whirlwind of the Australian property market, there emerges an intriguing financial instrument that often flies under the radar, but holds immense potential in smoothing the path to homeownership - the deposit bond. What exactly is a deposit bond, and when should you consider leveraging its benefits over the traditional cash deposit? Let's delve into this financial enigma and discover its hidden advantages.

Demystifying the Deposit Bond

A deposit bond serves as a substitute for the 10% cash deposit typically required when purchasing property. Purchased from an insurance company or financial institution, a deposit bond guarantees that the deposit will be paid either upon settlement or in the rare instance of a purchaser default.

This means that purchasers can avoid parting with a cash deposit - which can be substantial in todays market - and hold the funds in their existing investment or redraw accounts until the purchase actually settles.

For sellers, accepting a deposit bond is safe and may open up a wider pool of purchasers and increase the potential selling price.

Why Choose a Deposit Bond?

• Financial Flexibility : Opting for a deposit bond eliminates the need to tie up your funds in a cash deposit, allowing you to invest or retain liquidity elsewhere.

• Property Investment : For buyers transacting on multiple properties simultaneously, a deposit bond can help with cashflow.

• Buying at Auctions : In scenarios where immediate payment is required, such as auctions, a deposit bond can be an option in place of a cheque.

When Can a Deposit Bond Be Your Ally?

Off-the-Plan Purchases

When purchasing properties off-the-plan, where settlement might not occur for months or even years, a deposit bond can be a valuable asset. It allows you to secure the property without draining your cash reserves until settlement. Existing clients will know that I'm fanatical about keeping savings in offset as long as possible so I love deposit bonds in this scenario.

Cash Flow Constraints

For buyers or investors with limited cash flow, a deposit bond can bridge the gap between identifying the ideal property and finalising the purchase. For example, you might have found your dream home a month before your term deposit was due to expire. In this scenario, a deposit bond can be used to exchange immediately without breaking the term deposit early and paying the requisite penalties. This flexibility can make all the difference in seizing lucrative opportunities. However, it should be noted that the full amount will need to be paid upon settlement.

And the risks???

Firstly, you will need to check that the person you are buying from will accept a deposit bond as it isn't a given. Your Solicitor/Conveyancer may be able to help with this negotiation.

Also, you must bear in mind that if you default on the contract and the deposit becomes payable then the company that issued the bond will recover those funds from you. In other words the bond protects the seller. For the buyer, it's simply another financial tool to help manage cashflow.

Applying for a deposit bond is easy and can be done through your Mortgage Broker. You will need to be pre-approved for your home loan before applying for a deposit bond, and your Broker can assist with this.

In conclusion, the next time you find yourself doing the numbers on a potential real estate opportunity, consider whether a deposit bond could be a good tool to help you achieve your goals.

As always, I am happy to help with any questions on this so please email or call: megan.bourke@astutefinancial.com.au or 0423 208 235