Deposit Bonds

What are deposit bonds?

A deposit bond is a financial guarantee issued by an approved institution that takes the place of a cash deposit when purchasing property. This instrument provides security to the vendor while allowing you to preserve your cash for other purposes until settlement.

How deposit bonds work

Instead of paying a cash deposit, you purchase a bond that guarantees payment of the deposit amount to the vendor if required. The bond issuer charges a premium for this guarantee, which is typically much less than the cost of alternative funding arrangements.

• Bond guarantees payment of deposit amount to vendor
• Usually issued for 6-12 month periods
• Premium costs typically 0.75-1.5% of deposit amount
• No ongoing payments or interest charges required
• Bond provider pays vendor if you default on purchase

When deposit bonds are useful

Deposit bonds can be particularly valuable in specific circumstances where cash preservation is important or when you need time to arrange your finances for settlement.

• Insufficient immediate cash available for deposit
• Funds currently tied up in term deposits or other investments
• Purchasing off-the-plan properties with extended settlement periods
• Bridging finance scenarios where timing is critical
• Auction purchases where immediate deposit payment required

Benefits for property buyers

Using a deposit bond can provide significant advantages, particularly in terms of cash flow management and investment flexibility during the period between contract and settlement.

• Preserves cash flow for other opportunities or emergencies
• Allows you to keep investments earning returns until settlement
• Often cheaper than bridging loan interest costs
• Provides flexibility for extended settlement periods
• Enables property purchase while arranging optimal financing

Requirements and limitations

Deposit bond providers have specific requirements that must be met, and not all property transactions will accept these instruments instead of cash deposits.

• Strong financial position and credit history required
• Pre-approved home loan usually necessary
• Signed property purchase contract needed for application
• Not all vendors or situations accept deposit bonds
• Must still have settlement funds available at completion

Cost analysis considerations

When considering a deposit bond, compare the premium cost against alternatives such as liquidating investments, bridging loans, or delaying the purchase until sufficient cash is available.

Compare deposit bond premium against opportunity cost of liquidating investments, bridging loan interest, or potential property price increases if purchase delayed.

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