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[NEW VIDEO]: How To Use Deposit Bonds Instead Of A Cash Deposit When Buying An Investment Property

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Deposit Bond vs. Bank Guarantee: Which is Right for Your Property Purchase?

Securing your next property is an exciting endeavour, but the financial aspects can sometimes be daunting, especially for retirees looking to downsize and transition to a new chapter in their lives. Whether you’re seeking an apartment by the beach, a cozy townhouse, or a penthouse with a view, the path to securing your ideal property should be as smooth as possible.

If you’re in this situation, you may be wondering about the best way to provide a deposit for your new property without tying up your hard-earned cash. Two popular options to consider are deposit bonds and bank guarantees. In this article, we’ll compare these financial tools to help you make an informed decision that suits your unique circumstances.

What is a Deposit Bond?

Let’s start with the basics. A deposit bond is a financial instrument designed to instil confidence in property transactions. It serves as a guarantee to the seller, ensuring that if for whatever reason, the buyer defaults on the property purchase, the insurer will fulfill the deposit requirement. Deposit bonds provide flexibility, ease of acquisition, and can be applied to various property transactions.

What is a Bank Guarantee?

On the other hand, a bank guarantee involves a promise from a bank that it will cover a specific financial obligation should the buyer fail to meet it. In the context of property purchases, a bank guarantee is similar to a deposit bond in that it acts as a guarantee to the seller that the buyer will fulfil the deposit requirement when necessary. Unlike deposit bonds, bank guarantees require the buyer to provide security to the bank usually in the form of a term deposit or property security, therefore tying up their assets as collateral, which can negatively impact financial flexibility.

Benefits of Deposit Bonds;

  • Preserving Your Investments: You may have your wealth tied up in various investments. Deposit bonds allow you to keep your investments intact while securing your property.
  • No Need to Use Superannuation: You won’t need to draw on your super fund, keeping your retirement savings intact and continuing to earn you a return.
  • No Home Equity Required: Unlike bank guarantees, deposit bonds don’t require you to use your home or other assets as security.
  • Peace of Mind: Deposit bonds provide peace of mind to both buyers and sellers by ensuring the deposit is secure.
  • Quick to Arrange: Deposit Bonds can be arranged within one or two days which ensures you are less likely to miss out on your property. On the other hand, bank guarantees take weeks to organise due to the requirements of the bank to have various legal documents and securities put in place.
  • Cost Effective: A Deposit Bond costs around 3% per annum (without the need to provide property or cash security) which is around half the cost of borrowing the money from a bank.

Benefits of Bank Guarantees;

  • Pay as you go: Banks often allow for the payment of the bank guarantee fee to be made on a ‘pay as you go’ basis such as paying 6 months in advance. A deposit bond needs to paid for in advance however you may qualify for a rebate if your property settles early.
  • Access to a wide range of properties: Due to bank guarantees being around for a longer period than deposit bonds, they are currently more widely accepted.
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