A deposit bond is an alternative way of paying a deposit when
you purchase a property and usually costs around 1% of the purchase
price. It is a document which guarantees payment of the 10% deposit
on settlement or default giving the vendor security. No cash is
provided by the purchaser on exchange, rather the full purchase
price is paid at settlement. If circumstances arise where the
deposit would be forfeited, the insurance company pays the deposit
to the vendor and then seeks payment from the purchaser for the
It is important to understand that a deposit bond does not mean
the insurance company pays the deposit if it is forfeited, it
simply guarantees payment to the vendor. The purchaser will then
need to pay the deposit back to the insurance company. The
purchaser is still liable for all other costs under the contract
due to their default.
Why use a deposit bond?
Deposit bonds can be useful in a number of circumstances:
If a purchaser is waiting for funds to come from another
source, for example the sale of another property, and does not want
If a purchaser's equity is in their home rather than liquid
If a purchaser is intending to bid at auctions;
If a purchaser is buying off the plan as settlement is often
years after exchange; and
If a purchaser has the funds that would otherwise be the
deposit invested and does not want to take them out of the
investment until settlement. It is worth noting that cash deposits
can be invested by the depositholder if mutually agreed by the
purchaser and vendor, although that will be at bank interest
Downfalls of deposit bonds
Deposit bonds have expiry dates which you must be aware of. They
usually expire on the earlier of settlement, rescission or the set
expiry date. The premium paid for the deposit bond is not
refundable if the deposit bond is not used.
The vendor may be reluctant to accept a deposit bond if they
want the deposit to be released early to enable them to purchase
another property. Purchasers should always seek the vendor's
permission to use a deposit bond to ensure there are no surprises
or issues at exchange.
Some agents will be reluctant to allow offers from purchasers
with deposit bonds as their commissions are often taken from the
deposit prior to its release to the vendor. A deposit bond will
mean they may be chasing their commission from the vendor after
Deposit bonds can be very useful when purchasing a property,
however it is important you seek the vendor's consent and are
aware of the cost and expiry date of the deposit bond.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Warranties can be risk-shifting mechanisms when the party giving the warranty is not the party at fault for the defect.
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