Want to invest in a luxury property but don’t have access to the cash deposit? You’re not alone. Buying a luxury property requires a cash deposit big enough to make your eyes water, but many property investors don’t have ready access to the cash needed. Maybe the cash is locked away in a home you intend to sell or across multiple property portfolios. At the same time, smart investors don’t want to lose access to their cash – especially if it’s working harder elsewhere.
The answer could be a deposit bond. Deposit bonds have long been a mystery in the property world and there’s a common misconception that they are only for people who cannot afford the cash deposit.
The reality is, if you’re interested in investing in luxury properties, deposit bonds can be the most cost-effective and convenient solution to secure the purchase, while leaving your cash working hard in other places.
Read on to find out why.
How deposit bonds work
A deposit bond is a substitute for the cash deposit required between signing the contract of sale and settlement of a property. Just like a cash deposit, a deposit bond guarantees the commitment of a purchaser to an unconditional contract of sale. It works like an IOU for the deposit amount up until settlement, where you simply pay the full purchase price including the deposit amount.
Just like a cash deposit, if you (as the purchaser) change your mind and do not proceed, you will lose the deposit. In the event of a claim on the deposit bond, the insurer and the deposit bond provider will pay the vendor the deposit amount, and proceed to recover the funds from you. So it pays to make sure you are committed.
Advantages of deposit bonds for property investors
Whether you don’t have ready access to cash or realise that it’s more financially viable to use a deposit bond, here are the advantages:
Deposit bonds are quick and easy
It takes almost no time to apply and obtain a deposit bond (especially if you choose the right deposit bond provider!). Take the most common scenario. You are buying an established home, unit or land purchase that settles within six months and you have finance approval already that is unconditional or subject to valuation. A deposit bond provider can issue you a deposit bond for you by just providing your photo ID, signed application, finance approval letter and contract of sale. The deposit bond could be issued within 1-3 business hours.
No interest to pay
To secure a deposit bond you pay a one-off fee (premium) just before your deposit bond is released. You do not have to pay interest for the term of your deposit bond.
Buying Off The Plan
Off-the-plan purchases are renowned for long settlement periods, sometimes up to five years. All this time, your cash deposit is tied up without any benefit to your back pocket. Could your money be put to better use earning interest or reducing other loans in that time? By using a deposit bond in place of a cash deposit, you can make the most of your savings and relieve financial pressure elsewhere.
Deposit bonds are unsecured
Unlike bank guarantees, deposit bonds are unsecured, which gives you the flexibility and freedom to use your cash or even sell your property during the time that your deposit bond is active. During application, a deposit bond provider will assess your serviceability, including your assets and liabilities, to make sure that, at settlement, you can secure the finance or funds for your new purchase.
Deposit bonds can be used at auction
An auction bond is a type of deposit bond that can be used to buy property at auction. Think of it as a blank cheque. If you have the winning bid, you simply write in the amount of the deposit and hand it over to secure your purchase. If you aren’t successful at the first auction, you can use the deposit bond for the next and the next, until you are successful.
Deposit bonds can be a smarter alternative to cash.
Deposit bonds are not only used when you don’t have access to cash – some property investors have the cash ready to go but realise that deposit bonds are simply a more financially viable option. That’s because the cost of a deposit bond is often cheaper than the cost of borrowing funds to pay the deposit, or redrawing on an existing home loan. The small fee you pay the provider to issue the bond is negligible compared to interest rates you might face when borrowing or redrawing.
That was the case for New South Wales business owners Steve and Samantha when they wanted to invest in a new waterfront home in Cronulla. They found a property in the perfect waterside location for their boating lifestyle and made an offer. However, the deposit was in excess of $150,000 with a settlement period over six months. Steve says he knew that using a deposit bond made good financial sense.
“I simply did the maths and worked out that, by putting the cash on our mortgage rather than using it for a deposit, over six months we would save around $5000 on interest. And that takes into account the deposit bond fee,” explains Steve. “It just made sense.”
Is a deposit bond right for you?
Every investor is different, so the first step is to work out whether deposit bonds are a financially viable option for your situation. Deposit Assure’s fee calculator will help you work out the premium so you can compare this to other options, such as redrawing.
Next, speak to your real estate agent or developer. Deposit bonds are becoming more acceptable, especially amongst developers, but it’s always best to check. Most agents and developers will only accept deposit bonds if they are backed by an ‘A+ Stable’ rated insurer, so choose your deposit bond provider with that in mind. This provides certainty to vendors, developers and real estate agents that your bond will be honoured.
About Etienne Rizzo
Etienne Rizzo is co-founder at Deposit Assure. His goal is to transform the way people think about deposit bonds and, ultimately, make it easier for people to use them to buy property. With Etienne at the helm, Deposit Assure is changing the game for homebuyers across Australia and has rapidly built a reputation amongst property professionals for its exceptional customer focused approach. If you want to learn more about deposit bonds and how they could help you purchase your next investment property, Deposit Assure’s concierge team will assess your situation and, if a deposit bond is what you need, they will guide you through the entire process.