What Are Deposit Bonds and When Are They Useful?
When investing in property a deposit is paid upon the contract going unconditional. If your money is tied up elsewhere a deposit bond can be used in it’s place.
Sometimes, when you’re purchasing an investment property, you may not have the cash that you need for the deposit right there and then. Often, when you purchase, you’re putting 5%, 10% of the deposit down. And for those people who have their cash tied elsewhere or may need their cash for other things, there is something called a “deposit bond” that you can use to put down as, I guess, a replacement for the deposit and you’ll then pay it in future.
To understand more about this, I have Etienne on with me today from Deposit Assure. He supplies people with deposit bonds. He’s the expert in this, so we’re going to talk today about what exactly deposit bonds are and what sort of people and situations they’re useful in.
Ryan: Hey, Etienne, thanks for coming on today.
Etienne: Hey, Ryan. Thanks, mate, I’m really stoked to be on here. I’m a big supporter of your podcast, so really looking forward to this one.
Ryan: Yeah. Well, we appreciate you coming on and getting your knowledge as well. Do you want to just quickly introduce yourself and then just answer people, what exactly is a deposit bond?
Etienne: Sure, okay. My name is Etienne Rizzo. I’m one of the co-founders of Deposit Assure. We’re a business that’s been set up about a year and half ago now. We’re backed by QBE Insurance, which basically means that our deposit bonds are underwritten by QBE, which is effectively the strongest underwriter in our current market in Australia. They’re an A+ credit rated agency.
To answer your question, Ryan, what is a deposit bond? If your audience goes back to the last time they bought a property, they would have had to provide the real estate agent and their vendor a 10% deposit. So, up to 10% of the purchase price to basically affirm their commitment to their unconditional contract of sale. Sometimes, it can be 5% as well, but effectively, like a cash deposit, what it does is it just basically gives the vendor some assurance that the sale is going to go through.
For some people who either don’t have ready access to that cash, so you could be basically a first time buyer, for example, who’s borrowing 100% of the purchase price and don’t have the funds you need of the 10% to secure the property, you could use a deposit bond. Or, a property investor who is buying their first investment property.
Now that you’ve built some equity in your home, your money is working for you and your offset account, you don’t want to use it to secure the property. You could apply for a deposit bond in that situation as well.
The third, probably, scenario, Ryan, is buying and selling, which we see a lot of. So when somebody’s selling their property and the funds from that property is being used to fund the property they’re buying, they are waiting for the funds to arrive on settlement. So they don’t have access today to that cash to secure the property they’re buying.
So those are, I guess, the main scenarios we see with deposit bonds.
Ryan: Yeah. And we’ll talk a little bit more about them. Because I know people are probably familiar with the bridging finance when you buy and sell, but then, they don’t often think about, okay, well, I actually have to pay 10% of the deposit 6 weeks or 4 weeks or however long it is before you actually settle and get that property. I need to come up with this large amount of money that not everyone has at that point in time. So deposit bond is one way to get that.
What do you mean it’s backed by QBE? How exactly do they work? So we put down a deposit bond, which is kind of like, is it an I.O.U.? Is that effectively what it is? Like, you’re saying to the real estate agent, “I owe you the 10% deposit?”
Etienne: Yeah, that’s right. So, to answer your question, when we assess the client’s ability to receive a deposit bond, we have to make sure we are comfortable. And when we say, “we”, ourselves and our underwriter, QBE, that they will be able to settle on the day. So we don’t just give deposit bonds to anyone. There’s some strict criteria that we go through. And that’s the most important thing.
So QBE Insurance, they are obviously, they have a bonds division and, basically, they guarantee the person – the purchaser – for that particular deposit bond. What happens is, it’s basically the substitute for the deposit required from signing their contract to settlement. So if there’s a claim on the bond within that period, ourselves and our underwriter, QBE, will pay the vendor that cash deposit within 48 hours.
From that point in time, we will then retrieve those funds from the purchaser themselves. So, it’s not a get-out-of-jail card and that’s why it’s an insurance and that’s why we pay a fee and that’s where the cost comes down for QBE to underwrite this product.
Ryan: Yeah. So, I think, it’s for people who don’t have the cash right now, but will have the cash and be able to pay it at a later date. It’s not like some magical way of not paying a deposit or something like that. And so, I do get the feeling it is like an I.O.U. card, but it’s an I.O.U. card backed by QBE Insurance. And so, if I was to put down a deposit bond and say, “Yeah, I’m going to buy this house.” and then I disappear to another country or something like that.
Then, they can go to QBE and say, “Hey, Ryan’s disappeared. Can we have our deposit?” and QBE will say, “Yup. Here’s your money.” And then, they’ll try and find me in whatever place I’ve disappeared to. Yeah?
Etienne: You’re exactly right. You know, the strength of QBE really assists us because they are many for off the plan. There are many developers like Mirvac and Caydon that only accept deposit bonds by QBE. So it’s just in this current climate that we’re in, it just gives an additional weight, I guess, that our deposit bonds are strong and they will be honored.
Ryan: Yeah. So that’s something that I wanted to ask. How accepting are people of deposit bonds? I know most people, when selling their house, they’re expecting to get a deposit. I imagine you talk to people, they don’t really understand what deposit bonds are. So, how accepting are sellers of deposit bonds in the current market?
Etienne: Okay. It’s a very good question. The reason why – there are a couple of deposit bond players in the market and the reason why deposit assures the new entrant and why we’ve decided to come into this market is that there are still such a lack of understanding and awareness about what they are. Now, when I say that, I mean, within the business space, as well. So brokers, conveyancers, solicitors, banks as well as, property investors and consumers.
So, what we always say is, you do have to get approval from the real estate agent and their vendor to accept deposit bonds. And we do find that a lot of people still, to this day, don’t know what they are. And one of the biggest challenges that we face, if you were to look at our SWOT analysis that we’ve done, is this low awareness.
Especially banks, I think right off the plane, a lot banks, the major banks, don’t accept deposit bonds sales as part of their pre-sales. So that’s a challenge that we are facing and we’re trying to address. But, what we have is an education program with webinars and marketing materials that target the different stakeholders as well as consumers that try and educate what they are and the value that they provide.
Because we do feel that they are underrated in this market and we do believe that they have a place in this market just like bank guarantees do, just like bridging loans do. They’re just another option in a toolkit of your mortgage broker or your conveyancer or in your own hands as a property purchaser.
Ryan: Yeah. So if I’m expecting to use a deposit bond, I kind of need to be expecting that I’m going to have to sort of educate the real estate agent or educate the seller what exactly this is and how they are actually getting security in order for them to accept that.
Etienne: Okay. Look, I’ll answer that with probably in 10 inquiries that we have about deposit bonds, I would say that 70% of the time the vendor or real estate agent have heard of it or know about it. And the other time, we need to have a phone call on behalf of the client to sort of run them through what it is, explain the QBE backing and assure them, either by email or over the phone, about how the process works.
That’s part of our proposition to help any investors in your audience or anyone else about deposit bonds. There is a little bit of explanation that may need to happen at this point in time, but we’re expecting over the next 2 or 3 years, as our marketing plan rolls out, that that’s going to be less and less frequent.
Ryan: Yup, okay, cool. Let’s talk about – we’ll go into the situations of when these deposit bonds are useful. One of the things that we talked about before this was people who are looking to invest, but have their cash tied elsewhere.
Maybe they’ve just found this awesome property that they want to get signed or whatever, but they haven’t gone through the process of getting access to the equity they have or something like that. And so, they need to put something down and so, maybe they put a deposit bond down or there might be other situations like if someone’s getting family guarantor and they’re getting 100% of the loan or 100% plus fees, which I have seen some people do.
They still have to come up with the deposit and sometimes people don’t have the money for the deposit. That’s why they’re going with the family guarantor in the first place. And so, a deposit bond is a way for them to put down a deposit that’s secured and then use the family guarantor to buy the property and to come up with all the funds as well.
What are some other situations that people tend to use these in? I want to get people to understand, when are these useful? When should they consider, “Okay, I need to think about maybe using a deposit bond now.”?
Etienne: Okay. The most common example, Ryan, that we see is simultaneous sales and purchase. So, too often, individual and families find themselves needing to buy and sell on the same day. But they don’t have a cash deposit as their equity is tied up with the sale of their existing property. This could be a young family, so settling their existing home and buying a new home on the same day. Or even a retiree, we do get a lot of retirees using this who are asset-rich.
You know, we’re baby boomers, they’re obviously the most asset-rich populous around and they intend to buy smaller homes. So, upsizing and downsizing is an extremely popular use of this product, which we see a lot of. Which I would say would be 60% of the deposit bonds we do on a daily basis.
Ryan: Okay, yeah. Let’s go deeper into this. Because I think people are aware of bridging finance. So if you purchase a property and you’re selling your property, but it hasn’t quite sold yet or you need to purchase the property before your property sells and you get that money, people tend to apply for bridging finance.
Which is a certain type of finance that you have for a period of time until your property sells and you then get all the cash and you pay that bridging finance off.
But, what a lot of people don’t think about is, okay, well, before I actually settle, I actually need to pay a deposit maybe 4 weeks or 6 weeks ahead of that and so, people who may be – they might need bridging finance. Or they might sell their house a week before they move into the next one, they still need to come up with the deposit and they don’t always have that money. So you’re saying that that’s where deposit bonds become really useful for those types of people.
Etienne: That’s right. You’ve hit it on the head, Ryan. So bridging finance, that takes into effect, I guess, post-settlement. You still need a product or a way to secure the property with the 10% on the day of signing of the contract.
So it’s a completely different product. Bridging loans still have their place in it, but if you are using the funds from the property you’re selling to buy a new property, you still need to put down that 10% and the deposit bond is a great solution to achieve that need.
Ryan: Okay. Yeah. So, basically, I guess, you can put it all in the overarching thing of people who just have their cash tied up elsewhere, but they want to be able to purchase a property and they need to be able to secure a property with some form of a deposit and so, they use a deposit bond for that. Does that kind of summarize it?
Etienne: Yeah. Or, they don’t have the cash at all. So it’s used elsewhere, but they still have it or they actually don’t have it with them today for whatever reason. Like in a buy-and-sell scenario that we talked about, that’s correct.
Ryan: Yeah. Or in family guarantors situations.
Etienne: Or in family guarantors, especially.
Ryan: They don’t actually have that money, they’re getting it from the bank to purchase the property and so they need a deposit bond to get through that.
Okay. This sounds really interesting. What are the sort of costs that come with deposit bonds? What sort of costs should people be expecting?
Etienne: Sure, okay. For short term deposit bonds – when I say “short term”, I’m saying settlements between 3 to 6 months away. The fee is 1.3% of the deposit bond them out. So let’s say you’re buying a property for $500,000, the deposit bond you need is 10%, $50,000, the fee for that would be a one-off fee of $650 that you pay once the bond is approved and before it’s released and you don’t pay any other fees.
There’s no interest. One of the things to point out with the fee is there’s no money other than the fee exchange in hand. Some people think it’s a way to get financed, so it’s definitely not that at all.
Ryan: Yeah. So it’s a one-off fee that you pay. So let’s say I’m using a deposit bond to pay 10% of a $500,000 property or $50,000. I pay that fee of $650 to your company. Do I then need to pay anything else or is the deposit bond then just issued? Like, that’s it, the deposit bond is for that $50,000. Do I need to put in 5% of that $50,000 or anything like that?
Etienne: Okay, no. So that’s what you need to pay, it’s a one-off fee, which is one of the advantages of a deposit bond versus in a bank guarantee – that there is that one-off fee. You don’t need to pay anything else.
Once the bond is approved, you’re effectively sent out to the vendor’s solicitor and you’ve secured that property purchase. And then at settlement, your funds will be released either from the sale of your property or from the finance that you have approved and you pay the full amount plus costs, stamp duty plus, obviously, that deposit.
Ryan: Yup. And then what happens to the deposit bond after the full property has been paid for? Does it just cease to exist?
Etienne: Exactly. It expires either when the term is up or when settlement happens, either one of those.
Ryan: Whichever happens first then forces it to expire.
Etienne: That’s exactly right. For any other bonds, for off the plan, or for auction bonds or things like that that are over 6 months, the fee varies and there’s a sliding scale. So, obviously, the longer the term, the more expensive the deposit bond is as there’s more perceived risk, more things can go wrong. And there’s a free calculator online, which I’m sure you could point your audience to if they need, where you just simply enter the deposit amount required, the bond term, and we can go up to 60 months/5 years or 5.5 years in Queensland. And on some special circumstances as well, we can look at bonds over that period of time for off the plan and it just will output the fee straightaway. So it’s one fee.
Ryan: Yeah. So if you guys want to check that out, I just Googled “deposit assure”, which is Etienne’s company, and the fee calculator came up as one of the options on Google. So it must be that heavily clicked. I found it really easy, just search “deposit assure” and you’ll be able to find that fee calculator if you want to do some numbers yourself and find out how much it’s going to cost.
When I did it and I was thinking, okay, the longer term, it will probably be cheaper because you’re doing it for longer so you’re going to get more fees, you know, “buy in bulk” sort of thing. But, really, then you explained to me, oh yeah, the longer someone has, whether it be 5 years versus 3 months, a lot more can happen to that person in 5 years. People will change jobs or lose jobs or a whole scenarios happen where people’s lives change and they may not be able to pay it. So the longer you’re going to have it, the more expensive it’s going to be and for 3-6 months or whatever, that 1.3%, it sounds really cheap to me, truthfully.
Etienne: Yeah. And it’s designed like that. Obviously, look, in short term, when it’s 3 or 6 months, we issue bonds based on the fact that you’ve either got formal finance approval or you’ve got the funds to settle from selling your property. So we can have the confidence, based on those two things, that you as a client are going to settle, you know, 3 months’ time. That’s why it’s not as risky. That’s why the fee is so low at 1.3%.
Whereas, anything can happen in 12 months’ time, like you said, we don’t know if you’re going to get financed. You might have a pre-approval, but like you said, something might happen and all of a sudden, you come up to settlement and you can’t settle. And then, obviously, we have to pay the vendor that amount. That’s why it all changes in terms of pricing and why we can’t give a one-off fee for anything over 6 months.
Ryan: Yeah. And that’s as well why deposit bonds just aren’t given out to any person. You need to actually have those funds and be approved for it. You guys need to be assured that I actually have the money to pay it. Because, obviously, you don’t want to pay it and then chase me and I don’t actually have any money to pay that deposit. That makes sense.
What are the risks when purchasing using a deposit bond? Are there risks associated with that?
Etienne: Yeah. From our perspective or from the client’s perspective, Ryan?
Ryan: Well, obviously, you’ve got the risk that the client might disappear and you’re going to have to pay the money. Let’s say I’m buying a property and I’m using a deposit bond. Is there any risk for me buying the property? And from the seller accepting a deposit bond, is there any risk for them?
Etienne: Okay. For yourself, as long as you’re aware, and we make you aware of this – that it’s not a get-out-of-jail card, like I said before. And that if you do not settle on the day, we are going going to be basically knocking on your door, Ryan, and saying, “Listen, you need to pay us that $50,000 that we’ve paid your vendor.” and there’s an indemnity that you have to sign with the application form that obviously confirms your understanding of this.
So that’s one thing there. I mean, in terms of you paying the deposit bond fee, if you do pay the deposit bond fee, there’s no risk in you.
I mean, we’ll send that back to you if, for whatever reason, it’s not approved by QBE. So there’s no risk in terms of your investment on that deposit bond fee. I can’t think of anything else there for you.
Ryan: Yeah, and for the seller?
Etienne: For the vendor, obviously, with the QBE backing, we try and assure them. Obviously, cash is king in this day and age and it’s obviously quite a challenge, like I said before, with pre-sales where they can only accept a certain amount of property sales with the deposit bond, if any. So for them, even though they know they’re going to be paid, it’s still not in their hand today.
You know, it’s still 48 hours from the moment there is a claim. So there’s still that perceived risk, I guess, from their perspective, but that’s why we have the QBE backing to help minimize and offset that risk from their perspective. Yeah, I hope that answers your question.
Ryan: Yeah. Well, I guess, there doesn’t seem to be any risk that if I’m using one and it’s accepted, that there’s going to be any problems. I can’t really see anything.
Ryan: I guess the only risk I can see is that if I’m wanting to purchase a property with a deposit bond, then maybe some wary sellers or there may be some developers who can’t accept them or won’t accept them.
Ryan: And so, there is obviously a risk there with a deal not happening because you don’t have the deposit. But, obviously, I guess, people would understand that and know that and do their best to, you know. Like, when you’re negotiating, you would talk about that and it would have to be accepted.
Etienne: Yup. That’s one of the first things we do when we check it. At the end of the day, even if you do apply and get through that process, we will refund the deposit fund fee if, for whatever reason, they don’t accept at the last minute. But, worst of all, obviously, you’re in a position where you haven’t been able to secure that property because you don’t have that 10%. So we try and get that at the front and we try and acknowledge it at the very beginning to make sure you’ve cleared that.
Ryan: But yeah, I think someone investing using deposit bonds should be savvy enough and should be aware enough to say, “Well, this isn’t cash. People aren’t going to accept it as readily as cash. And so, I need to understand that some deals may be accepted or may not be.” So, I guess, go in with your eyes open if you’re an investor looking to use them. That’s a hurdle that you need to overcome.
Etienne: Yeah. And also, for real estate agents and for vendors, it’s an opportunity to get access to new markets as well. There are many people who, because there’s low awareness of deposit bonds, there are many people who are probably sitting on their current property that has some equity that are thinking, “Well, we can’t really buy property because we don’t have access to that 10%.” So with the awareness and the education that’s going through, at the end of the day, you get it on an offer on the table that’s a deposit bond, it’s as good as a cash offer.
It’s guaranteed to be paid within 48 hours if something goes wrong. And why would you not accept a deposit bond for a sale of a property, you know?
Ryan: Yeah. Especially if the property is going for the right price, you’ve got that security backed by QBE and stuff like that. Why wouldn’t you accept it? You’re kind of a bit crazy not to if it was a good offer.
Etienne: Exactly right. You know, you’ve hit it on the head. But, you know, it’s an awareness exercise that we’re undertaking and we hope that it would generate new business for everybody involved – the vendors and all the stakeholders in the property transactions.
Ryan: Yeah. So do you think this opens new doors for some investors who want to invest but feel like they can’t? Do you think that people are held back because they feel like they don’t have a deposit, it’s tied up in equity, that may be able to invest now that they’ve learned about deposit bonds?
Etienne: Yeah. And we see this on a day-to-day basis. We get the majority of our clients that come direct to us, Ryan. A lot of them have heard about deposit bonds from a broker or conveyancer or a solicitor and many of them who have bought multiple properties have said to me that they wished they knew about this for their first property that they’ve bought or the second property that they’ve bought. So that’s something that is because of the low awareness, like I said. So it definitely has some value.
Ryan: So what has held these people back? Is it just the lack of funds for a deposit immediately even though they can get financed for the full property? I’m trying to think, there’s probably someone sitting listening to this right now that’s thinking, “Well, I’ve got a couple of properties. I don’t have a deposit to go and purchase another one. Can I use deposit bonds to get me over the line for the next property?” assuming they can get financed?
Etienne: That’s exactly right. If you’re a property investor, you’ve got either one property with some equity in it or you’ve got multiple properties. Basically, you’re looking to buy a property to finance the full cost by leveraging the equity in your existing real estate. So you could be a young couple buying your first investment property or an investor looking to buy an off the plan that settles in 36 months, so to speak.
So based on your current equity, provided it passes our equity calculation, which we have a concierge team on hand that can basically ask you a couple of questions that can say, “Yes” or “No” immediately, whether you’re going to be eligible for a deposit bond.
If you do have the required equity, then, basically, we can issue it within 24 hours of you providing us a signed application and all the supporting docs that are provided. So, like you said, in that situation, 24 hours later, you’ve got your deposit to secure your next investment property.
Ryan: Yeah. Which puts you in a pretty good position to go out into that market and then look for your next deal and things like that.
Etienne: Correct. And if you’re looking to buy one at auction, we can do one as well at auction, but we don’t have the details of the property listed as well, so you can re-use it at multiple auctions until you’re successful. And then, on the day that you’re successful, you can put down the actual name, obviously, the vendor’s details and the property details on the deposit bond itself. So that’s another option as well.
Ryan: Yeah. Okay. So this could open doors for some investors who haven’t yet pulled the equity out, but they know that they have it. They can get a deposit bond for quite a small fee, it’s not huge, and they can have that deposit bond and then go and look for the next deal and then use their equity to then finance that deal in the future. That’s really exciting.
I never thought of that application, that it could actually open doors for existing investors to jump into the next property a little bit easier.
I think we’ve covered everything. Are there any questions that you think that I’ve missed that people should understand about deposit bonds?
Etienne: Not quite. I think we’ve pretty much covered everything. Like I said, they’re an option that I think everybody should look at when you’re looking to put down that 10%. You know, just have a look. Does it make sense for you to use a deposit bond instead of using your cash? If it does, you know, there’s a fee calculator there where you can check the cost. I think we’ve covered most of the main questions, I guess.
The other thing to touch on is that we have the concierge service, so if anyone ever has any questions of how it works in their situation, like I said, we can assess and pre-qualify them over the phone and we can actually lodge their application on their behalf and get them to sign it so it’s nice and easy.
Ryan: So what’s the best way for people to get in touch with you or to find out about this concierge service or to get more information?
Etienne: Okay. They can email [email protected], so B-O-N-D-S. And they can just tell us the details of what they’re looking to buy and we can return them back with either a phone call or the information in an email. Or they can call our hotline on 1-300-798-797.
Ryan: Yup. I’m guess they can also go to depositassure.com.au and get in touch with you guys through there, too.
Etienne: They can go to depositassure.com.au as well and you can have a look at the quote calculator and there’s also all the different scenarios for buying and selling off the plan and investment properties where we outline how they work and how they can benefit you guys. The purchase and the sale of the deposit bond and they should get all the information you have there.
Ryan: Awesome! Well, thank you so much for your time. I really appreciate learning more about deposit bonds. I have a better idea of what exactly they are, how they’re backed by the insurance company and then what sort of people can use them and where you would use them. I really appreciate your time.
Guys, if you want to learn more about deposit bonds, you can go to depositassure.com.au. And we’ll leave it there for today. Until next time, stay positive.
Well, I hope you guys enjoyed that interview with Etienne from Deposit Assure. Now, Etienne has offered you guys 10% off your deposit bond fee if you simply mention that you came from On Property or that you heard about Deposit Assure through this episode at On Property.
So, if you ever do need a deposit bond and you ever go to Deposit Assure, let them know that you came from On Property and you will get a 10% discount on your fee. So, thanks Etienne for offering that to On Property listeners. Thank you, guys, for tuning in and listening or watching today and until next time, stay positive.