When buying a home, it often involves juggling the selling of one asset to finance the next purchase if you don’t have a large deposit saved up. Getting the timing right is rarely easy. If the purchase option comes up before the sale of the existing property you don’t have to call it off. Check what is a deposit bond and the options related to it.

The Deposit Bond Option

This option replaces the requirement of a cash deposit, from you, when purchasing a property, if acceptable to the seller.

You don’t have to liquidate your assets immediately to initiate a purchase. It is also cost-effective. The bond costs vary depending on the complexity of the transaction and the term length. 1.3% of the amount of the deposit could be expected for a simple transaction. For example, if an individual obtained a 10% deposit bond of $50,000 (for a property value of $500,000) for an established property in NSW, with a 6-month term, the fee will be about $650.*

Insurers issue deposit bonds to the seller of the house. At settlement, the buyer must pay the full purchase price, which will include the amount of deposit. At this point, the deposit bond becomes void.

If the buyer fails to complete the purchase of the property, the seller calls in the deposit bond from the insurer who will pay the seller the entire value of the deposit bond. The insurer then approaches the purchaser for reimbursement of that bond.

Deposit bonds are cheaper than a short term loan and are an option if you are not a first time home buyer. Talk to your mortgage broker first to guide you on the best way forward, to assess your ability to service loans, and to be sure you don’t have other options in your portfolio that you were not aware of.

New Government Scheme For First Time Buyers

If you are a first-time home buyer, then the Australian Government has the initiative to help those who are eligible. The First Home Loan Deposit Scheme (FHLDS) is administered by the National Housing Finance and Investment Corporation (NHFIC).

The purpose of the scheme is to alleviate costs for eligible first home buyers by omitting the need for LMI. You, the first time buyer, can proceed with a deposit of just 5% (lenders criteria apply). The NHFIC will guarantees up to 15% of the property value, financed by an eligible home loan, to a participating lender.

An additional 10,000 FHLDS places are available for the 2020-21 financial year.

If you need any additional information not covered here, contact us today. We have the depth and breadth of expertise and experience to establish the most appropriate loan solutions for your home purchase.