Deposit Bond and Deposit Guarantee

Save money when purchasing property with a deposit bond.

A deposit bond is a guarantee issued by to the vendor of property. It acts as a substitute for the cash deposit between signing a contract and settlement of the property. At settlement the purchaser is required to pay the full purchase price including the deposit. The use of a deposit bond guarantee does not remove the obligation of the purchaser to pay the full deposit upon settlement.

A deposit bond guarantee can be issued for all or part of the deposit amount required, up to 10% of the purchase price. Acceptance of the deposit bond guarantee in lieu of a cash deposit is at the sole discretion of the vendor.

Deposit bond products available include:

• Short Term Guarantee- with an expiry date of 6 months
• Long Term Guarantee- for purchase contracts where the Sunset Clause is between 6 and to 36 months

Should the purchaser default under the contract of Sale/Offer and Acceptance, the vendor can claim the amount guaranteed from the deposit bond supplier. The deposit bond supplier will the seek to recover this amount from the purchaser

Quick & Easy

Deposit bonds can be organised either directly through Ability Finance or your lending institution. Most applications are processed within 24 hours.

The deposit bond guarantee terminates on settlement of the property, when the contract is terminated, rescinded or the expiry date has passed, whichever occurs first. It also terminates when a claim is paid by the deposit bond supplier.

Alternative to Short Term Finance

For many people, short term finance is costly and time consuming involving additional application fees, high interest rates and delays in processing. Deposit bonds can usually be arranged much quicker and for less cost than bridging finance loans.

Economical - one fee, no interest

The cost savings could be considerable. For example, the fee for a $30,000 Short Term Guarantee is $360. Short term finance may cost you $727 based on an application fee of $450 (often 1.5% of the borrowed amount), plus interest payable of $277 (assuming an 8% interest rate over six weeks).

By using a deposit bond you may have saved $367.

Flexible for Auctions

Deposit bond guarantees are ideal for auctions. A deposit bond guarantee is issued prior to auction so that the purchaser can gain the vendor's acceptance of the guarantee beforehand.

The property and vendor's particulars are left blank and the purchaser is authorised to complete these details if they are the successful bidders.

Deposit bond is secure because payment is guaranteed by the deposit bond supplier. The guarantee cannot be cancelled where it has been relied upon to sign a contract.

Deposit bonds can simplify the process of buying and selling your property. In many cases, vendors accepting the use of a guarantee by purchasers will secure a sale quickly, particularly in situations where people are looking to buy and sell at the same time.

The process differs slightly depending on where you wish to purchase.

Private Treaty (Non-Auction) Auction

1. Determine property to be purchased and agree price with agent/vendor.

2. Ensure sufficient purchase funds will be available for contract completion (finance approved, existing funds to be available, definite sale of current property).

3. Apply for a deposit bond guarantee including copy of contract and other required information.

4. Deposit bond guarantee approval issued.

5. Sign contract including deposit guarantee details and any other conditions.

6. Deposit bond guarantee given to Stakeholder (Real Estate Agent/Solicitor) as deposit commitment.

7. Contracts exchanged (properties in Victoria only, not required for other States or Territories).

8. Settlement occurs with full purchase price being paid, including amount represented by the deposit bond Guarantee.

9. Property is now yours.

Auction

1. Ensure sufficient purchase funds will be available for contract completion (finance approved, existing funds to be available, definite sale of current property).

2. Conduct any necessary checks prior to auction.

3. Ensure that auctioneer and vendor are prepared to accept a deposit bond guarantee at least 2 days prior to auction.

4. Apply for deposit bond guarantee including copy of contract and other required information.

5. Deposit bond guarantee approval issued.

6. Successfully bid at auction. (If not, deposit bond guarantee is still valid for other auctions).

7. Sign contract including deposit guarantee details.

8. Deposit bond guarantee given to Stakeholder (Real Estate Agent/Solicitor) as deposit commitment.

9. Contracts exchanged.

10. Settlement occurs with full purchase price being paid, including amount represented by the deposit bond guarantee.

11. Property is now yours.

Questions and answers for the buyer/purchaser

Who can apply for a guarantee?

Those eligible are: Existing property owners who wish to purchase property, investors who wish to expand their property portfolio and first home purchasers.

Why do purchasers like deposit bond guarantee?

Like many of today's purchasers, cash for the 10%, or even 5%, deposit required to enter into a contract on another property is often tied up in the current home or other investments. This can mean either expensive bridging finance or borrowing from a finance company at high interest rates. Regardless of where the finance is obtained, interest charges, establishment fees and other up-front costs connected with the loan can be expensive and time-consuming to arrange.

Deposit bonds offer an efficient, secure alternative that saves you time and money.

Does the guarantee cost less than other deposit options?

A six month deposit bond guarantee representing a $30,000 deposit would cost a once only fee of $360 (including any applicable stamp duty).

Short Term finance for $30,000 on the other hand could cost you:

• An application fee (often 1.5% of the amount to be borrowed) = $450
• Interest payable (assuming interest rate of 8%) for 6 weeks = $277

The total cost of bridging finance in this example is $727.

In this example a deposit bond guarantee can be less expensive and is usually approved and issued within 24 hours of your application, thus enabling you to quickly enter into an Offer and Acceptance on your new property.

(Above example only applies to settlement less than 6 months).

Can I use the guarantee at auctions?

Yes. A guarantee can be issued prior to you attending an auction. The guarantee amount is fixed, but not the property details, so you can attend a number of auctions. You simply complete the vendor and property details on the Guarantee Certificate when you are the successful bidder.

Will the vendor accept the guarantee?

The guarantee is legal and available in all states and it is at the sole discretion of the vendor to accept it. The vendor is often anxious however to obtain a contract of sale on the property and secure a deposit commitment from the purchaser. The guarantee can usually be organised within 24 hours, contracts are signed and the property is sold.

It is recommended that a Suggested Special Condition (found on the back of some Guarantee Certificates) is inserted or annexed to the Contract of Sale. This condition will amend the deposit provisions and allow the Guarantee to be used.

When does the guarantee expire or terminate?

The guarantee ceases when the Contract of Sale is completed, terminated, rescinded or the expiry date occurs, whichever happens first. The Guarantee also terminates when a claim is paid by the deposit bond supplier, the guarantor.

Can I obtain a refund if I don't use the guarantee?

Usually. If you return the unused, original guarantee certificate within 30 days of issue the fee will be partially refunded. An administration fee may be deducted and the balance will be mailed to you.

Questions and answers for the seller/vendor.

How can a guarantee help you sell your property?

The convenience of using a deposit bond guarantee will attract some purchasers who have difficulty accessing the full cash deposit. Sometimes people looking to sell their home and buy another have trouble raising the deposit when they have funds tied up in their home or investments. Short term finance can be costly and time consuming whereas the guarantee is usually less expensive and can be organised easily and quickly. The average value of a guarantee is $30,000 and costs the purchaser only $360 (for a 6 month guarantee); saving expensive outlays in application fees and interest for short term finance. Deposit bond guarantees are legally effective throughout Australia.

In situations where a full 10% deposit is not available (95% finance) a full 10% deposit commitment can be obtained to protect you.

Can the guarantee be used at Auctions?

Yes. The flexibility of the guarantee at auctions is one of its key features. A deposit bond guarantee is issued prior to auction so that the purchaser can be assured of acceptance of the guarantee beforehand.

Does the Contract of Sale need amending for the deposit bond guarantee?

Yes, in all States except New South Wales. Since 1996, the Standard Contract for Sale of Land in NSW carries a clause recognising the deposit bond guarantee as a legitimate deposit transaction.

In other States, the Suggested Special Condition (found on the back of the Guarantee Certificate) amends the Contract of Sale and enables the guarantee to be used instead of a cash deposit. It also states that the purchaser must pay all monies owing to you at settlement, under the Contract of Sale including the Guarantee amount. Check with Ability Finance to ensure that this Suggested Special Condition is inserted or annexed to the Contract of Sale.

What happens if the purchaser defaults under the Contract of Sale?

If you are entitled to retain the deposit you can claim the amount from the deposit bond supplier. This amount will be paid to you or the stakeholder nominated in the contract when the deposit bond supplier is provided with the necessary documents. The guarantee cannot be cancelled where it has been relied upon to sign a contract.

Do I have to accept the guarantee?

You have the sole authority to accept or deny a request by the purchaser to use a deposit bond guarantee in a property transaction.

Where can the deposit bond guarantee be used?

The deposit bond guarantee is legally effective and accepted by vendors in all States and Territories. The guarantee was first introduced by Vero Insurance Limited (formerly Royal & SunAlliance Insurance Australia) in 1989, since then it has strongly grown in popularity throughout Australia. Traditionally, deposit bond guarantees have performed best in New South Wales with approximately one in four residential property transactions involving the guarantee.

The rapid growth in NSW was aided by the Law Society of NSW and the Real Estate Institute of NSW acknowledging the use of guarantees or bonds.

Real Estate Agents

Do I have to accept a deposit guarantee?

The only person who has the authority to accept or deny a request for a purchaser to use a deposit bond guarantee is the vendor. The vendor has sole discretion to use the guarantee.

Do I need to amend the Contract of Sale if a deposit bond guarantee is used?

A Suggested Special Condition is included on the reverse of the deposit bond guarantee certificate. This should be annexed to the Standard Contract of Sale when a guarantee is being used (not required with standard NSW Contract of Sale of Land). This suggested condition enables the guarantee to be substituted for the cash deposit and requires the purchaser to pay the full purchase price including the deposit represented by the guarantee at settlement.

Can the guarantee be used at Auctions?

Usually. The guarantee can be very useful for purchasers wanting to bid at an auction as it can be difficult for them to organise a cash deposit beforehand, particularly when they are not sure if their bid will be successful.

The guarantee can be issued prior to the auction so you can gain the vendor’s acceptance of a deposit bond guarantee beforehand. The vendor and property details on the guarantee certificate will be left blank and the purchaser is authorised to complete these details if they are the successful bidder.

The suggested special condition on the reverse of the guarantee certificate should be inserted into the contract when signed on the day of the auction.

What happens if the purchaser defaults under the Contract of Sale?

If the purchaser defaults under the Contract of Sale and the vendor is entitled to retain the deposit, the vendor can claim the Guarantee amount from the deposit bund supplier.

When does the guarantee terminate?

The guarantee ceases when the Contract of Sale is completed, terminated, rescinded or the expiry date occurs, whichever happens first. If the contract is forfeited by the purchaser, the guarantee terminates when the claim is paid by the guarantor.

How do I arrange a deposit bond guarantee for a purchaser?

The simplicity of using a guarantee is one of its main attractions. Contact Ability Finance and the guarantee will normally be issued within 24 hours.

What do I do if the vendor, purchaser or I need more information?

Contact Ability Finance.