A deposit bond (guarantee) takes the place of the cash deposit required between the time of exchange and settlement of the residential property you are buying. This guarantee is a convenience for you, the purchaser, as it alleviates the burden of trying to access cash to raise deposit monies. It also means you must pay the full amount of the purchase price, including the amount of the deposit, at settlement. The deposit bond can secure your right to purchase for up to four years, while your investments can continue to yield a higher return than standard bank interest. The vendor accepts the guarantee from the underwriter. This guarantee can only be "cashed in" should you as the purchaser not settle, thereby entitling the vendor to take your deposit. In this event, the deposit bond is claimed, and the underwriter must pay to the vendor any outstanding deposit monies limited to the face value of the deposit bond. Now, when would you use a deposit bond?
Buying a house, unit, or land with freehold, strata, or leasehold title, whether by private treaty, at auction, or off-plan.
By using the deposit bond, you can continue to save your savings. There is no need to sell shares or mortgage any assets to raise the deposit monies, which could lead to the potential loss of benefits through needlessly breaking investments. Moreover, your costs are lower because there is a once-only payable fee, and the deposit bond does not need to be secured as a bank guarantee would. It is also cheaper than paying interest or the costs of refinancing prematurely.
Deposit bonds can be issued with terms ranging from 3 months to 48 months. The sunset date stated in the Contract for Sale usually determines the term needed.
You must be able to prove that you can settle the property. It is a similar process to that of a standard loan application, including the assessment of adequate income and sufficient equity to meet current and proposed financial commitments. Standard rules of assessment apply, you also need to be an Australian resident or corporate entity. Note that Purchasers using deposit guarantees have been first home buyers, retirees, investors, and lifestyle seekers.
If you are able to use the finance-backed (6 months) application form, the usual turnaround time is 24 hours from receipt of all necessary documents. If you need to use the equity backed application form – the usual turnaround time is 24–48 hours from receipt of all necessary documents.
If you fail to settle the property, thereby breaching your obligations under the Contract for Sale, the Vendor may become entitled to the forfeiture of your deposit. The underwriter will then receive a claim from and subsequently pay to the Vendor the deposit monies in accordance with his commitment as guarantor. Pursuant to the terms of the Indemnity agreement contained in your application form, you are liable for this debt and therefore must reimburse the underwriter. Failure to do so will result in the Underwriter instigating recovery proceedings with full recourse against you.
The underwriting entity making the promise to pay the Vendor also makes payments to the Vendor as required.
The Purchaser: by securing the opportunity to buy a home. The Vendor: through selling to a qualified purchaser. Also, in the event that the Vendor becomes entitled to forfeiture of the deposit, the Underwriter of the guarantee pays the monies owing to the Vendor or its nominated representative. Add to that the Vendor’s Solicitor: a streamlined and expedited exchange process.