When an individual, private superfund or a business purchases residential or commercial real estate, albeit for own use or as an investment, an immediate deposit, typically 10% of the purchase price, is payable to the vendor in order to exchange the Contract of Sale.
Rather than put up cash or bridging finance, which both tie up working capital, a Deposit Bond acts as an interim substitute for the deposit. Typically a 10% cash deposit is paid upfront, with the remaining 90% paid at settlement date.
With a Deposit Bond, a nominal premium is paid upfront to secure a Deposit Bond for the value of the required deposit and 100% of the purchase price is paid at settlement.
The purchaser retains the use of their cash reserves or avoids having to borrow for the deposit.
Deposit Bonds, underwritten by several major insurance companies (the ‘guarantors’), replaces the upfront deposit payment.
The Deposit Bond guarantees to the vendor that, in addition to the 90% purchase balance due at the settlement date, the 10% deposit will also be paid, i.e., 100% of the Contract of Sale.
In essence, paying the initial 10% deposit is deferred, i.e., the time value of money and the opportunity costs to utilise retained cash for other purposes.
In terms of dollar value, we haven’t hit the limit as yet. In terms of period, we can issue Deposit Bonds on real estate contracts up to 60 months settlement.
The purchase of established real estate is typically settled within a ‘short period’ (under 6 months) and is typically supported by an ‘unconditional’ letter of finance from a recognised financial institution. On this basis, no additional financial assessment is undertaken.
‘Longer term’ settlement of purchased real estate (largely off the plan acquisitions) aren’t typically supported by an ‘unconditional’ letter of finance, thus applications are assessed on the applicant’s identification; net assets; and the ability to service the loan.
The premium depends on the dollar value of the Deposit Bond and the period of time before settlement. Premiums increase depending on the larger the bond amount and the longer the period before settlement. The reality is that premiums are far more cost effective, than foregoing cash or covering bridging finance costs.
To enable an indicative quote, please complete the "Deposit BondEnquiry Form". A representative will be in contact within one business day.
Deposit Bonds for residential real estate purchases have been available for many years and are widely used by the market, including leading financial institutions issuing their own co-branded Deposit Bonds in conjunction with various insurance company providers.
Deposit Bonds for commercial real estate purchases are a more recent option, so awareness amongst commercial real estate vendors is growing.
The insurers are leading, credit rated Australian or global brands and, as with other financial institutions, are APRA licensed. There’s no commercial reason to differentiate between the credit worthiness of bank or insurer issued ‘sureties’.
Ultimately, however, it’s at the Landlord’s discretion whether or not to accept a Commercial Lease Bond.
Having said that, it seems rather shortsighted that a vendor will happily place $5M, $10M, $25M Property Insurance (‘short tail risk exposure’) or indeed, $5M, $10M, $25M Public Liability Insurance (‘long tail risk exposure’) with an Australian Prudential Regulatory Authority (APRA) approved and licensed Australian insurer, yet, question the security of the same insurers over a $50K, $100K or $250K insurance bond. APRA is the same government authority that also approves and licenses Australian financial institutions. Insurers and financiers are similarly regulated.
Commercial Lease Bonds applications will be assessed within 3 business days from the receipt of all necessary documentation.
We’ll advise the insurance broker if the applicant has been successful or otherwise.
If the applicant wishes to proceed we must receive ‘cleared’ funds before issuing the insurance bond.
Yes, so long as you don’t use the bond and return it within 30 days
of issue, we will refund the premium paid, less an administration fee of
$110 (including GST).
If it’s our error, we’ll replace at no cost, plus send you a bottle of wine. If it’s your error, a replacement fee of $110 (including GST) applies, and we get to drink the bottle of wine. J
If the purchaser defaults on the Contract of Sale, the vendor can claim the deposit amount from the Deposit Bond guarantor (the insurer). The guarantor will then seek to recover the deposit amount from the purchaser. This is no different to the vendor being entitled to retain the 10% ‘cash deposit’ paid by the purchaser, should they default on a Contract of Sale.
Embedded in the Deposit Bond Application Form is a counter indemnity undertaking that must be signed before a Deposit Bond can be issued.
The guarantor (the insurer who issues the Deposit Bond) gives the guarantee provided by the Deposit Bond on the understanding that the purchaser will pay the vendor the bond amount on the settlement date of the Contract of Sale. The Counter Indemnity is the legally binding right the purchaser gives to the guarantor to pursue recovery against the purchaser for any part of the bond amount paid to the vendor, if the purchaser defaults on the Contract of Sale.