A Deposit Bond May Allow You to Secure Your Dream Property
When you don't have the required cash on hand to make a deposit on a property and you don't want to miss the opportunity to acquire it, a deposit bond can be used as an alternative. It can be the perfect solution but it is important to fully understand the rules and conditions involved.
Here's what you need to know about deposit bonds and how you can use one to get the property you desire.
Deposit Bond Basics
In a sense, the deposit bond is equivalent to an insurance policy. It is a document that assures the vendor that they will receive the amount of the deposit, together with the remainder of the purchase price, at settlement.
Reasons for Using Deposit Bonds
The benefits of a deposit bond can be considerable and include such advantages as:
- Avoiding expensive bridging finance
- Allowing your savings or investments to remain untouched and therefore continue to earn interest
They can also be used in different purchasing circumstances such as; when buying off the plan: where the dwelling is not yet built, and buying at auction.
Different Types of Deposit Bonds
There are three different categories of bonds commonly in use.
1. Bonds subject to loan approval. This deposit bond will follow along with the buyer's loan approval process and usually unconditional loan approval is a requirement. These bonds incur the lowest costs and have short term validity for up to six months. They are ideally suited for auction purchases.
2. Bonds without lender approval requirement. The process to acquire this type of bond is more involved. It requires more paperwork and is much like making the loan application itself.
This form of bond is more expensive because of the extra work involved. However it can be valid for a longer period of up to four years. These bonds are usually used in situations where properties are yet to be built at a future date as in "off the plan" purchases.
3. Bonds secured with existing equity. These are bonds where the purchaser self declares their income and minimal documentation is required as confirmation. The purchaser needs to supply proof of identity, the approved value of the property used as equity and mortgage payment history.
For a quick idea of your eligibility for gaining approval, use this simple calculation:
- Add the outstanding amount on the loan that remains for the property used as security to the sum required for the deposit bond.
- If this amount is less than approximately eighty percent of the value of the security property, the application is likely to be successful.
The deposit bond provides a very convenient means to arrange a quick property purchase. To be sure that you are making the right decision, always consult with conveyancing solicitors like Geoff Williams & Associates for professional advice before going ahead.
Conveyancing professionals will also point out a few of the downsides to deposit bonds that you need to be aware of.
Drawbacks that May Arise with Deposit Bonds
Problems may arise if a vendor is taken unawares and is expecting a cash deposit. They may be relying on the funds to make a cash deposit on a purchase of their own. They will therefore be reluctant to accept a bond. It is essential that the vendor is specifically notified that a deposit bond will be used.
Estate agents receive their commissions from deposits and may also be disinclined to accept deposit bonds. Purchasers may be trapped if the contract does not state specifically that a deposit bond will be used. Both parties may then be involved in disputes and incur unwanted extra costs.
Avoid any of these circumstances from arising by seeking agreement with the vendor that a deposit bond will be acceptable.