What is a mortgage deposit bond?

The process of purchasing a home, or any property, typically involves exchanging contracts with the previous homeowner. As part of agreeing to this contract, you are required to pay a percentage as a deposit, which is usually 10 per cent of the purchase price of the home. While the ideal option is paying in cash, the alternative involves buying a deposit bond and using that to settle the home-buying agreement. A deposit bond guarantees that you will pay the full deposit after you get the home loan and settle the contract, which itself is a promise that you’ll buy the house and pay for it using the loan amount.   

What is the procedure for lodging a deposit bond?

Before you go about buying a deposit bond, you should first check with the seller if they accept a deposit bond as some sellers may prefer receiving a cash deposit. Purchasing a deposit bond isn’t always a straightforward transaction as the vendor has to approve it, which can require verifying that you have arranged to finance the house purchase, such as by getting a pre-approval from a mortgage lender. 

Once the vendor accepts your offer on their house, you need to complete an application and pay the deposit bond fee, calculated as a percentage of the deposit amount, before contracts can be exchanged. The bond fee can also vary based on the term of the deposit bond, especially if you take more than 6 months to settle the property purchase. If you are requesting your home loan lender to include home-buying costs such as stamp duty to the loan amount, you may want to ask about the deposit bond fee as well.

What are the pros and cons of a mortgage deposit bond?

The most significant advantage offered by a deposit bond is the convenience of not having to arrange a substantial amount of cash. Suppose you need to pay 10 per cent of your home’s purchase price as the deposit. If the home is worth $500,000, 10 per cent amounts to $50,000, which can take time to arrange. Further, suppose the fee for issuing a deposit bond is about 1.3 per cent of the deposit amount for settlement under six months, which works out to $650 for the above example. You’ll naturally find it easier to come up with $650 than with $50,000. 

Buying a home loan deposit bond may also prove cheaper than either pulling money out of a term deposit or applying for a bridging loan. Also, mortgage deposit bonds are protected by Australia’s National Consumer Credit Protection Act, which makes them a low-risk financial instrument. You can also choose between a short-term and long-term deposit bond, depending on the time it might take you to arrange the financing for your home. While this will affect the fee you pay, the cost is low considering the benefit of having more time to apply for a loan.

You may also benefit from buying a mortgage deposit bond if you plan to buy a home through a property auction, or if you are looking to purchase an off-the-plan house, as long as the auctioneer or the property developer accepts the deposit bond. Note that you would need to buy a deposit bond that does not mention the seller’s name or anything about the property, as you would only know these details once you bid and win at the auction. Also, in the case of an off-the-plan purchase, you can buy a longer-term mortgage deposit bond valid for a year or more, since the property may not be fully constructed and pay the full deposit at a later time.  

On the flip side, you may purchase a deposit bond and find that the seller won’t accept it. It is also possible that the deposit bond vendor may not approve your application if, for instance, you don’t have a regular income. 

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