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Deposit bonds

From Money Magazine, June 2003

If used properly, deposit bonds are an efficient way of securing the house of your dreams before you receive the funds from the property you are selling. Effie Zahos reports.

It’s not unusual for financial products to hit the market with a sales pitch that sounds too good to be true. It usually is, but sometimes the promises are real. This is the case with deposit bonds.

In brief

• Deposit bonds remove the need for property buyers to pay a cash deposit at the time contracts are exchanged.
  
  
• While these products are an innovative way of breaking into the property market, deposit bonds, if they are misused, can be dangerous.
  
  
• Deposit bonds may replace the need for a cash deposit, but they do not remove your obligation to pay the full deposit and purchase price at settlement.
  
  
• Purchasers like them because they keep their cash until settlement. Vendors accept them because they act as a financial guarantee. That is, the bond gives the vendor security that should, for whatever reason, the purchaser not proceed with settlement on the property, the bond can be converted to cash.
  
  
• The cost of a deposit bond is based on the value of the property and the length of time to settlement. It can also vary between underwriters and agents. At the very least you can expect to pay around 1% of purchase price. It’s a one-off fee that’s usually partly refundable if you don’t use it.
  
  
• “Get rich quick” property seminars are notorious for promoting the use of long-term deposit bonds to buy a number of properties using very little cash of your own.
  
  
• The idea here is that you buy multiple deposit bonds to secure a number of off-the-plan apartments, with the expectation that you will sell for a profit before completion.

What the experts say

“If used properly, deposit bonds should work well,” says Macquarie Bank’s head of property research, Rod Cornish. “Where there is a problem is when people take up multiple deposit bonds to buy a number of properties. We don’t really know how widespread this is.”

For the complete story see Money Magazine's June 2003 issue. Subscribe now.