Home Loan Deposit Bonds

Submitted by Anonymous (not verified) on Wed, 08/26/2009 - 12:59

The full deposit is usually required sometime following the initial payment of a smaller holding deposit when purchasing property. This larger deposit is usually payable at the time contacts for sale are exchanged. This deposit is most commonly 10 percent of the purchase price although at times a lower percentage may be negotiated such as 5 percent instead of the usual 10 percent deposit.

When purchasing a $300,000 property for example, at the time the contacts are exchanged the purchaser must pay $30,000 dollars deposit if the deposit requirement is 10 percent, or $15,000 if the deposit requirement has been negotiated at 5 percent of the purchase price.
In many cases these days purchasers may not have this cash available prior to settlement. This can occur where an investor is purchasing another property and using security in another existing property to support the new loan.

An example would be where an investor has an existing property valued at $300,000 and a loan of $100,000 on this existing property. The investor is purchasing another investment property for $300,000 and borrowing the costs for this purchase as well by taking out a loan for $330,000. Combining the 2 security properties results in an overall security value of $600,000 and a combined loan size of $430,000. The loan to value ratio is now 72% overall which avoids mortgage insurance if the loan is applied for as a full documentation loan.

No funds from the new loan will be available until the loan actually settles and the investor is required to pay the full deposit on exchange which is often six weeks before settlement.

A solution to cover this cash shortfall is to obtain a deposit bond or as it is sometimes called a deposit guarantee. A deposit bond is issued by a company who guarantees to the vendor of the property that the deposit will be paid at time of settlement.

Deposit bonds can often be obtained for a few hundred dollars and can certainly be cheaper and more convenient that short term finance.
No deposit home loan applicants and even low deposit home loan applicants often find a deposit bond an easy and convenient method of covering the deposit gap between exchanging contracts and actual settlement.
Most deposit bonds are effective for periods of up to six months and there are deposit bond options available for longer terms that are very useful for investors and other purchasers purchasing property off a plan before actual construction commences. A deposit bond eliminates an investor having large amounts of cash tied up in deposits where off the plan purchases can span many months.
Most finance brokers are able to organise a deposit bond for their clients.