Low deposit options for first time investors – Part 1: Deposit bonds
For many would-be investors, saving for a deposit presents the biggest challenge on their property investment journey.
A 20% deposit is great – but it can take years to achieve. In the meantime, attractive investment opportunities are missed and wealth creation is delayed.
However, there are options that enable you to secure a property with as little as a few hundred dollars.
Deposit bonds, vendor financing and house and land packages are three low deposit options available to investors. Each of these will be discussed in detail across a three part blog.
Part 1 – Deposit bonds
A deposit bond acts as a substitute for a cash deposit. They can be issued for all or part of a deposit (which is usually around 10% of the purchase price) and provide a guarantee to the vendor that the cash will be provided by settlement.
Offered by most lenders, they are a useful, low cost strategy when a cash deposit isn’t readily available and are particularly helpful when buying properties with lengthy settlement periods, such as those purchased off-the-plan.
A deposit bond has three major advantages for the investor:
- Low cost: The fee for a deposit bond is typically around 1.2% of the amount represented by the bond which can equate to as little as a few hundred dollars!
- Quick: Deposit bonds can often be issued on the same day.
- Sufficient cover until settlement: The lender will determine the time frame that the deposit bond remains active for but it is often six months or more – sufficient time to cover most settlement periods.
These features mean investors have the ability to act quickly, beat other buyers and secure attractive opportunities with very little cash and within 24 hours. They also allow more time to source funds from savings or other investments.
Most vendors and agents will accept a deposit bond, but it is at the discretion of the vendor so investors are advised to check in advance. You will also require approval if you intend to use them at auction.
To successfully apply for a deposit bond, you will still need to meet the bank’s lending criteria. In short, this means the ability to demonstrate that you have the capacity to pay the deposit as part of the full purchase price, plus fees, as well as service any other existing financial commitments you may have at the settlement date.
Stay tuned for the second part of this blog which will look at another low deposit alternative many investors are unaware of – vendor financing.
Grow faster with Deposit Bonds
No Cash? Use deposit bonds and bank guarantees to buy property quicker
Deposit bonds and bank guarantees are useful financial tools that enable investors to secure property when a cash deposit is not readily available.
They can be particularly valuable and inexpensive strategies for investors wanting to rapidly expand their property portfolios, act quickly on opportunities, and/or maintain capital during a lengthy settlement period, such as an off the plan purchase.
Deposit bonds are offered by most lenders and underwritten by an insurance company and can be used for all or part of the deposit. To be accepted for a deposit bond, buyers who have not already been approved for finance, need to demonstrate financial capacity to settle at the agreed settlement date.
The bond acts as a guarantee to the seller that the full purchase will be paid on settlement. The only immediate cost to the purchaser is the deposit bond fee which is payable to the lender.
As guarantor, the insurance company will pay out the deposit to the vendor if the purchaser reneges on the contract and, in turn, recover the funds from the purchaser.
Deposit bonds can be issued, usually in very short timeframes, for varying settlement periods ranging from a few weeks to a few years (depending on the provider), for investors purchasing off the plan.
A bank guarantee is similar to a deposit bond but can be more costly and time consuming, and requires security. The amount of the guarantee is secured dollar for dollar against another asset such as a term deposit or equity in an existing property.
Investors should familiarize themselves with these tools and assess their suitability as alternatives to cash deposits. They offer flexibility and the capacity to move quickly which can mean the difference between securing or missing out on a potentially lucrative property investment opportunity, and reaching your financial goals faster.