- How does a deposit bond work?
- What are the advantages of a deposit bond?
- How much does a Deposit Bond cost?
- Do you get your money back on a Bond if you do not purchase the property?
- How to apply for a Deposit Bond
- Will a Deposit Bond be accepted by all sellers?
What is a Deposit Bond?
A Deposit Bond is like an insurance policy that acts as a guarantee to the Vendor, also known as the seller, that the purchaser will pay the deposit at settlement. It is a legal substitute for a cash deposit.
How does a Deposit Bond work?
The “Deposit” part refers to the required payment in exchange of contracts and the “Bond” part refers to an obligation to pay the sum, like a type of contract.
No money actually changes hands until the time of settlement. On settlement when 100% of the purchase price is paid to the Vendor, the Deposit Bond simply lapses.
The Purchaser needs to apply for the Bond, pay a one-off fee and be able to prove that he or she will have sufficient funds available at settlement to complete the purchase.
What are the advantages of a deposit bond?
There are many reasons why a purchaser wants or needs to utilise a Deposit Bond. It may be that the purchaser has their funds tied up in term investment or have their funds tied up in other properties. The purchaser may have sold their property and will not have the funds available until the sale of their property settles. In a lot of cases, the purchaser is borrowing the full purchase price from their lender, therefore the funds won’t be available until the day of settlement.
The Bond issuer would need to sight a copy of the contract, evidence of the savings or funds in the term investment/bank accounts, a copy of the unconditional loan approval or evidence of the sale of the property (depending on whether it has exchanged or not). It may be that they require a copy of an unconditional loan approval proving that the full purchase price is being borrowed.
How much does a Deposit Bond cost?
Provided the Deposit Bond is not required to be valid for any longer than a 6-month period, the purchaser pays a one of fee, which is usually approximately 1.3% of the deposit required. For example, in the event that a deposit is $75,000.00, the fee would be approximately $975.00 which includes the issue fee. The fee varies slightly between different Issuers.
The cost of the Deposit Bond depends on the amount of the Deposit and the length of time that you require the Bond to be valid for.
In the event that you are purchasing unregistered land, purchasing off the plan or have an extended settlement period and you require a Bond to be valid for a longer period of time, these are generally assessed on a case-to-case basis, depending on the purchaser’s needs.
Do you get your money back on a Bond if you do not purchase the property?
You may be eligible for a refund, if the Bond is returned to the Issuer within 30 days from the date it was issued. You will receive a refund of the fee that you have paid, minus any issue/administration fees.
How does the Seller access the deposit if the Purchaser doesn’t complete the settlement?
If the purchaser defaults under the terms and conditions of the Contract and the Vendor becomes entitled to the Deposit, the Bond Provider/Underwriter is legally obligated to pay the Vendors claim (of the deposit). The Underwriter then has full legal right to recover the deposit paid to the Vendor from the Purchaser.
What is an Auction Bond?
An Auction Bond may be issued to a purchaser in the event that he or she is attending an Auction and is unsure of what the purchase price will be or whether they will even be the successful bidder. An Auction Bond is similar to a blank cheque.
If the purchaser is not the successful bidder, the same Bond may be used at another Auction. There is no need to apply each time you wish to attend an Auction. Alternatively, you may return the Bond and obtain the refund less an admin and processing fee.
If you are successful at Auction, you will complete the vendor’s name, property address and the final purchase price.
How to apply for a Deposit Bond
Most Lenders and Brokers should be able to assist you with arranging a Deposit Bond on your behalf.
If your lender is not able to help you, feel free to contact the team at Coutts as we are more than happy to guide you through the process and can apply for a Deposit Bond on your behalf, provided we have the necessary documents from you in order for it to be approved.
Coutts does charge a small fee for completing the Bond application on your behalf.
Will a Deposit Bond be accepted by all sellers?
Whether you are proposing to use a Deposit Bond or an Auction Bond, you should always seek instructions from the Vendor (through legal representation of course) as to whether they will accept this method of deposit.
ABOUT AMY DUGUID:
Amy joined the Coutts Lawyers and Conveyancers team in 2020 as a Licensed Conveyancer and Justice of the Peace in our Camden office. She was born in Camden and has been based in Camden most of her working life, therefore has created strong personal and working relationships in the local community and enjoys giving back to her hometown.
Amy brings 20 years of conveyancing experience to Coutts and is dedicated to guiding her clients throughout the selling and buying process.
For further information please don’t hesitate to contact:
Contact Coutt Lawyers & Conveyancers today.
This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.