Deposit bonds are being used increasingly in New South Wales and Queensland conveyancing transactions as an alternative to cash deposits.
A deposit bond is essentially a promise given by a highly-rated financial institution to pay a vendor a sum equal to ten percent (or occasionally five percent) of the purchase price in the event that the purchaser defaults at settlement. They are increasingly being offered as a substitute for a 10% cash deposit.
So for example, Terry wants to buy a property in Kellyville New South Wales for $1m with a 60 day settlement period. He doesn't have enough money to pay the 10% deposit on exchange of contracts but he will have more than enough to pay that and the remainder of the purchase price at settlement when he refinances his property portfolio. A deposit bond is a guarantee by a company like Deposit Assure that if Terry defaults at settlement, the vendor will be paid a sum of $100,000 by the deposit bond issuer. Terry hands the deposit bond to the vendor with the signed contract to secure the property.
With so much of household wealth tied up in property, this is a convenient alternative to buyers having to liquidate property or other non-cash assets to pay a contractual deposit which is due sometimes months before settlement.
"The added benefit is that these products are probably a lot safer than cash deposit from a cyber-safety perspective".
That is, professional cyber hacker sand scammers have recently been impersonating estate agents / conveyancers via email and giving fake payment instructions for payment of deposits. Millions have been lost in the last few years this way.
Deposit bonds avoid this risk by not requiring for large sums of cash to be transferred prior to settlement.
There a handful of deposit bond providers in the market but the provider that we have had the best experiences in dealing with are Deposit Assure.
If you're interested in the possibility of using a deposit bond on your next transaction, please speak to your conveyancer who will be able to arrange one for you.