How you can use deposit bonds to secure a property when you don't have enough savings for a deposit

If you’re a first home buyer who just hasn’t managed to reach their savings goal yet or you’ve got access cash but it’s all tied up in investments, a deposit bond could be the solution you need to secure your new home.

Whether you’re a first home buyer or not, you may find that when the perfect property comes up for sale, the cash you’d like to put down as a deposit is locked away elsewhere.

In the worst-case scenario, liquidating assets at short notice may mean making a loss – or at the least not maximising potential returns. In such instances a deposit bond may be the perfect solution to raising a deposit to secure a property.

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What is a deposit bond?

Put simply, a deposit bond is an alternative to a cash deposit.

It is in fact an insurance policy whereby an insurer guarantees the vendor that it will pay the deposit at settlement without any cash actually changing hands.

Deposit bonds are particularly useful for property buyers who may be rich in terms of assets but cash poor.

Deposit bonds can be well suited to long settlement terms or if you’re purchasing property off-the-plan.

For a first home buyer this can allow you to save that extra bit you need to meet lenders deposit policy and if you’re an existing property owner who’s upgrading, it’s gives you breathing space to liquidate other investments once they have matured, or are at their peak rather than when the situation dictates.

Another advantage of a deposit bond is that the associated costs are generally low, especially when compared to other finance solutions such as bridging finance or personal loans, where interest rates can be high.

What to consider

Like any financial product you need to exercise caution and consideration when using a deposit bond.

While it may sound like a perfect way around your cash problem, they aren’t a guaranteed acceptance, because of lack of understanding on the workings of deposit bond, some vendors, developers or real estate agents may not accept them.

To avoid any misunderstandings and contract disagreements discuss the use of a deposit bond with the vendor and / or agent to ensure they are willing to accept it before you progress too far into your negotiations.

What are the risk?

There is also the unlikely but possible scenario that you may default on your deposit bond.

While the insurer will only provide the bond if they are reasonably satisfied you can support it, defaults do happen.

In this case the insurer will provide the funds to the vendor and then seek the recovery of the deposit from you.

Looking to buy and don’t have enough savings to put down as a deposit? You can apply for a deposit bond with loansHub here.

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This article via Which Investment Property does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.