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Deposit Bonds - The Cash Alternative

- Sunday, December 06, 2009

If you’ve got cash but it’s all tied up, a deposit bond could be the solution you need to secure that new property.

Whether you already own property, managed funds or collectables you may find that when the perfect opportunity arises, the cash you’d like to put down as a deposit on property is locked away elsewhere.

In the worst case scenario, liquidating assets at short notice may mean making a loss – or at the least not maximising potential returns. In such instances a deposit bond may be the perfect solution to raising a deposit to secure a property.

What is a deposit bond?

Put simply, a deposit bond is an alternative to a cash deposit. It is in fact an insurance policy whereby an insurer guarantees the vendor that it will pay the deposit at settlement without any cash actually changing hands.

Deposit bonds are particularly useful for property investors who may be rich in terms of assets but cash poor.

Deposit bonds can be well suited to long settlement terms or if you’re purchasing property off-the-plan. This can allow you to liquidate other investments once they have matured, or are at their peak rather than when the situation dictates.

Another advantage of a deposit bond is that the associated costs are generally low, especially when compared to other finance solutions such as bridging finance or personal loans, where interest rates can be high.

What to consider in a Deposit Bond.

Like any financial product you need to exercise caution and consideration when using a deposit bond.

While they may sound like a perfect way around your cash problem, they aren’t a guaranteed green light; moreover, some vendors, developers or real estate agents may not accept them.

To avoid any misunderstandings and contract disagreements discuss the use of a deposit bond with the vendor and / or agent to ensure they are willing to accept it before you progress too far into your negotiations.

There is also the unlikely but possible scenario that you default on your deposit bond. While the insurer will only provide the bond if they are reasonably satisfied you can support it, these things do happen.

In this case the insurer will provide the funds to the vendor and then seek the recovery of the deposit from you.

If you’d like more info on deposit bonds please give us a call and we’ll run through your options.

Disclaimer
This article does not necessarily reflect the opinion of the author/s, Carruthers Financial Services Pty Ltd or any of its employees or subsidiaries. It is intended to provide general news and information only. While every care has been taken to ensure the accuracy of the information it contains, neither the author/s, Carruthers Financial Services Pty Ltd,'Carruthers Financial Services Pty Ltd's employees, or its subsidiaries, can be held liable for any inaccuracies, errors or omission. Copyright is reserved throughout. No part of this article can be reproduced or reprinted without the express permission of Carruthers Financial Services Pty Ltd expect for the use for which it was purchased for. All information is current as per the date of delivery and Carruthers Financial Services Pty Ltd will take no responsibility for any factors that may change thereafter. The purchaser of this article and all readers thereafter are advised to contact their financial adviser, broker or accountant before making any investment decisions and should not rely on this article as a substitute for professional advice.



 
David Carruthers is a credit representative (Credit Representative Number [400226]) of BLSSA Pty Ltd (Australian Credit Licence No. 391237).