Buying before selling
A homeowner may be purchasing another property before proceeds from the existing property sale become available.
Specialist Finance
Deposit Bonds
A deposit bond can sometimes be used instead of paying a cash deposit when purchasing property. It can be useful where funds are tied up elsewhere, but the buyer must still be able to complete the purchase at settlement.
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What is a deposit bond?
A deposit bond is a guarantee that may be accepted by a property vendor instead of a cash deposit when a buyer enters into a contract to purchase property.
Rather than transferring the usual cash deposit at exchange, the buyer provides the vendor with the deposit bond.
The buyer is still required to pay the full purchase price, including the amount represented by the deposit bond, at settlement.
When might a deposit bond be useful?
Deposit bonds can be helpful where a buyer has sufficient assets or approved finance but does not want or cannot access the cash deposit immediately.
Funds tied up in investments
Available wealth may be held in term deposits, investments or other assets that the buyer does not want to liquidate immediately.
Equity available but not yet released
A buyer may have sufficient property equity but not yet have access to the cash required for the contract deposit.
Off-the-plan purchase
A deposit bond may sometimes be used for eligible longer-settlement or off-the-plan purchases, subject to issuer and vendor requirements.
Auction purchase
Where accepted by the vendor, an appropriately arranged deposit bond may sometimes be used for an auction purchase.
Preserving cash flow
Some buyers may prefer to retain available cash for other purchase or settlement costs rather than tying it up as the contract deposit.
How does a deposit bond work?
The deposit bond issuer provides a guarantee to the vendor for an agreed amount, commonly corresponding to the deposit required under the contract.
The buyer pays a fee for the bond rather than paying the cash deposit directly to the vendor.
At settlement, the buyer pays the full settlement amount. The deposit bond then ceases to have a role once the purchase has been successfully completed.
A typical deposit bond process
The exact process varies depending on the transaction and bond provider.
- 1
Confirm the contract deposit
Establish the amount of deposit required and the proposed settlement date.
- 2
Confirm vendor acceptance
Check that the vendor and contract allow a deposit bond to be used instead of a cash deposit.
- 3
Review the buyer's position
Confirm the buyer has sufficient approved finance, equity, sale proceeds or other acceptable resources to complete settlement.
- 4
Apply for the deposit bond
Provide the information and documents required by the bond issuer.
- 5
Issue the bond
Once approved and the fee is paid, the deposit bond is issued for the agreed amount and term.
- 6
Provide the bond to the vendor
The bond is supplied in accordance with the contract requirements.
- 7
Complete settlement
The buyer pays the full settlement amount, including the amount represented by the deposit bond.
The vendor must agree to accept it
A deposit bond cannot simply be substituted for cash without considering the contract.
The vendor, selling agent and legal representatives may need to agree to its use, and the contract should clearly allow an acceptable deposit bond.
For an auction purchase, this should generally be confirmed before bidding because the successful bidder becomes bound by the auction contract.
What might the deposit bond provider assess?
The issuer needs to be comfortable that the buyer will be able to complete the property purchase.
Approved finance
Evidence of acceptable loan approval or lending capacity may be required.
Available equity
Existing property equity may support the application where relevant.
Sale proceeds
Where the purchase depends on selling another property, evidence of the expected sale proceeds may be required.
Cash and investments
Available savings or other acceptable assets can help demonstrate settlement capacity.
Purchase contract
The issuer may review the purchase price, deposit amount and settlement date.
Settlement strategy
The provider will generally want to understand how the full purchase price will be paid at settlement.
How much can a deposit bond cover?
The bond amount is generally linked to the deposit required under the property contract.
The maximum amount and acceptable percentage can depend on the bond provider, property transaction and term required.
The contract itself also needs to allow the proposed deposit arrangement.
How long can a deposit bond run for?
Deposit bonds can be issued for different periods depending on the transaction.
A short-term bond may be suitable for a normal property settlement, while a longer-term bond may sometimes be required for an off-the-plan purchase or another transaction with a delayed settlement.
The longer the required term, the more important it is to confirm that the buyer's settlement strategy remains realistic.
Common deposit bond scenarios
Deposit bonds can solve a timing issue in several different property transactions.
Upsizing
A homeowner buys the next property before completing the sale of the existing home.
Downsizing
A homeowner secures a replacement property while the current home is still being marketed.
Investment property purchase
An investor may have sufficient equity or approved finance but prefer not to use cash for the contract deposit.
Off-the-plan property
A longer-term bond may potentially be used where settlement is expected well after contract exchange.
Bridging transaction
A deposit bond may sometimes complement a broader bridging strategy where the buyer is purchasing before an existing property has sold.
Deposit bond and bridging finance are different
A deposit bond only replaces the cash deposit required at the contract stage.
Bridging finance is a loan designed to help fund the period between purchasing a new property and selling an existing property.
A buyer may potentially use both in the same broader transaction, but they solve different problems.
Deposit bond vs bridging finance
Both can be relevant where a buyer is purchasing before existing funds become available, but their roles are different.
| Comparison | Deposit Bond | Bridging Finance |
|---|---|---|
| Main purpose | Replaces the contract cash deposit | Provides loan funding between purchase and sale |
| Is it a loan? | No | Yes |
| Provides cash? | No | Yes, subject to approval |
| Repayment | No loan repayment, but a bond fee applies | Loan principal, interest and fees apply |
| Settlement requirement | Buyer must still fund the full purchase price | Bridging facility contributes to the settlement funding |
How much does a deposit bond cost?
Rather than paying interest like a loan, the buyer generally pays a fee for the deposit bond.
The cost can depend on the bond amount, required term, property transaction and provider.
Because the fee is generally paid for the guarantee itself, it should be compared with the alternatives available for providing the deposit.
Compare the alternatives
A deposit bond can be convenient, but it should still be compared with other ways of meeting the contract deposit.
Cash deposit
Using available cash may avoid the bond fee but ties up the funds until settlement.
Equity release
A borrower may potentially access equity from another property, but this involves additional lending and interest.
Bridging finance
Bridging may assist with the broader purchase transaction but carries interest and other lending costs.
Deposit bond
The buyer pays a fee for the guarantee while retaining cash or waiting for other funds to become available.
What happens if the buyer does not settle?
A deposit bond is a guarantee to the vendor, so failing to complete the purchase can have serious consequences.
Depending on the contract and bond terms, the vendor may be able to make a claim under the bond. The bond provider may then seek recovery from the buyer for amounts paid under that guarantee.
A deposit bond should therefore only be used where there is a realistic and well-supported plan to complete settlement.
Deposit bonds and auctions
A deposit bond may potentially be used for an auction purchase, but the important issue is acceptance before the auction.
Auction contracts are generally unconditional once the property is successfully purchased. The vendor or agent should therefore confirm that the proposed bond is acceptable before bidding.
The bond amount and wording may also need to satisfy the contract requirements.
Deposit bonds for off-the-plan purchases
Deposit bonds can sometimes be useful for off-the-plan purchases where settlement may be many months or even years away.
Instead of tying up a large cash deposit for that entire period, an eligible buyer may be able to use a longer-term deposit bond.
However, longer settlement periods create additional risk because the buyer's financial position, property value and lending environment can change before completion.
Things to consider with long settlements
A long-term deposit bond should be supported by a realistic future settlement strategy.
Finance conditions
A loan approval obtained today may not remain valid until a distant settlement date.
Property valuation
The lender will generally assess the completed property closer to settlement.
Income changes
Changes in employment, business income or debt can affect future borrowing capacity.
Interest rates
Rates and lender serviceability requirements may change before settlement.
Property market
The market value at settlement may differ from the original purchase price.
How I help with deposit bonds
My role is to look at the deposit bond as part of the complete property finance transaction.
That means understanding where the settlement funds will ultimately come from, whether finance has been properly considered and whether a deposit bond is an appropriate way to deal with the timing of the contract deposit.
Where the purchase also involves bridging finance, refinancing or another lending requirement, those parts of the transaction can be considered together.
A typical deposit bond journey
A deposit bond application is usually linked closely to the property purchase contract.
- 1
Review the purchase
Confirm the purchase price, required deposit and settlement date.
- 2
Confirm acceptance
Check that the vendor and contract permit an acceptable deposit bond.
- 3
Review settlement capacity
Confirm how the buyer expects to fund the full purchase at settlement.
- 4
Prepare the application
Provide finance, asset, sale and contract information required by the bond provider.
- 5
Approval and bond issue
Once approved and the required fee is paid, the bond is issued.
- 6
Exchange or auction
The bond is provided in accordance with the property contract.
- 7
Settlement
The buyer completes the purchase using the approved settlement funding strategy.
Deposit bond questions
Is a deposit bond a loan?
No. A deposit bond is generally a guarantee provided to the vendor instead of the buyer paying a cash deposit at the contract stage.
Do I still have to pay the deposit amount?
Yes. The full purchase price still has to be paid at settlement. The bond only replaces the cash deposit before settlement.
Does the vendor have to accept a deposit bond?
No. Acceptance depends on the vendor and the contract, so it should be confirmed before relying on a deposit bond.
Can I use a deposit bond at an auction?
Potentially, if the vendor agrees to accept it and the bond satisfies the auction contract requirements. This should be confirmed before bidding.
Can I use a deposit bond for an off-the-plan property?
Potentially. Longer-term deposit bonds may be available for eligible off-the-plan transactions, subject to provider requirements.
How much does a deposit bond cost?
The fee depends on factors such as the bond amount, term and provider.
Do I need home loan approval first?
The provider generally needs to be satisfied that you can complete settlement. Depending on the transaction, this may involve evidence of approved finance, equity, sale proceeds or other acceptable resources.
Can a deposit bond be used if I am buying before selling?
Potentially. This is a common scenario where the buyer expects proceeds from an existing property sale but needs to provide a deposit before those funds are available.
Is a deposit bond the same as bridging finance?
No. A deposit bond replaces the contract cash deposit, while bridging finance is a loan used to fund part of the broader purchase-and-sale transaction.
What happens if I cannot settle?
The consequences can be serious. The vendor may be able to claim under the bond, and the bond provider may seek recovery from the buyer. Legal advice should be obtained about contract obligations.