What is a Deposit Bond

A deposit bond is a substitute for a cash deposit for the interim period between the signing of a contract and the eventual property settlement. It is the easiest and most convenient tool available while purchasing property when an immediate deposit is required. A deposit bond is often termed as a simple insurance policy. Most property purchases involve payment of 10% as an immediate deposit, but the buyer may not have the money ready at that point. At such times a deposit bond comes in handy since it serves as an alternative for cash and can be paid to the vendor of property to initiate the sales process by exchanging contracts. The actual payment of the deposit can then be done at settlement time.

Deposit bonds are guarantees of payment and are underwritten by big insurance companies. As underwriters they charge a small fee which varies from company to company. However, it remains one of the cheapest options available as payment guarantees. Since there is a clear mention of cash deposit in the Sale contract, the buyer has to make the payment sooner or later, and the deposit bond helps him get some time to get his funds together.

The main purpose of the deposit bond is to act as a guarantee of payment, and not to make the payment. The application process for a deposit bond is similar to a loan application, and its validity is for a fixed period of time ranging from six weeks to forty eight months.

Benefits offered by Deposit Bonds

  • Offers ease of payment without having to break term deposits or raise funds at higher interest rates
  • Convenience of payment – deposit bonds help those who do not have the resources to make the 10% down payment when a sale contract is initiated.
  • Provides time – New home buyers need time to collect all their resources since they have very small savings amounts. Bonds provide them the comfort and the ability to initiate a property purchase.
  • Protects the sale vendor- In case of a default the sale vendor is protected since the insurance company that issued the deposit bond, will pay him his due, and recover the amount from the buyer.
  • Refunds possible- In the odd case of the deposit bond not being used, and being returned within a month of purchase, the insurance company often issues a refund after deducting a minimal service charge.

Deposit bonds are meant for the following categories of investors:

  • A property owner wanting to buy another property after selling his first one-he needs time to sell the first before paying for the second.
  • Young investors wanting to buy their first home but need a loan
  • Investors wanting to expand their property portfolio.

While deposit bonds are legal and binding, it is preferable for buyers to first verify with the sale vendor whether they are acceptable, since in odd instances, vendors may insist on a cash down payment of the stipulated 10% while signing the contract.

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