A deposit bond is a type of financial instrument that can be used in place of a cash deposit when purchasing a property. It acts as a guarantee to the vendor that the deposit will be paid, and is issued by a bank or other financial institution.
The buyer pays a fee to obtain the bond, which is typically a percentage of the deposit amount, and the bond is typically valid for a set period of time, typically up to 12 months. At the end of the set period of time, the purchaser will have to provide the cash deposit to the vendor or the bank will pay the deposit on the purchaser’s behalf.
When can a deposit bond be used?
A deposit bond can be used when a buyer is purchasing a property and is required to provide a cash deposit as part of the contract. Instead of paying the deposit in cash, the buyer can use a deposit bond as a guarantee to the vendor that the deposit will be paid. This can be useful for buyers who do not have enough cash on hand to pay the deposit, or who prefer to keep their cash in other investments.
Deposit bonds can also be used in situations where the buyer needs to move quickly to secure a property, but does not yet have the cash deposit ready. It can also be useful for buyers who are self-employed or have limited financial documentation, as they may not qualify for a traditional loan and may have difficulty obtaining the cash deposit.
It is important to note that deposit bonds are not suitable for all buyers or situations, and are typically only accepted by the vendor if they are satisfied that the buyer is financially capable of completing the purchase.
What is the pro-forma deposit bond general condition in the standard LIV contract of sale?
The pro-forma deposit bond general condition is a standard clause found in the Law Institute of Victoria (LIV) Contract of Sale. It outlines the conditions under which a deposit bond can be used as an alternative to a cash deposit when purchasing a property.
Specifically, it states that the vendor must agree in writing to accept a deposit bond as a substitute for a cash deposit. It also requires that the deposit bond is issued by a bank or other financial institution approved by the vendor and is valid for the entire settlement period.
Additionally, it makes clear that the deposit bond should be in the same amount as the cash deposit and that the purchaser will be liable to pay the full amount of the deposit if the deposit bond is not honoured by the financial institution.
It is important to note that this is a pro-forma clause which means that it is included in the standard LIV Contract of Sale, but it can be removed or modified by agreement between the parties.
General condition 15 is as follows:
How often is a deposit bond utilised when purchasing property?
The frequency of deposit bonds being utilised when purchasing property can vary depending on the location, type of property and the buyer’s financial situation. In general, deposit bonds are not as commonly used as cash deposits, but they can be a useful option for certain buyers.
According to some industry reports, deposit bonds are used in around 5-10% of property purchases in Australia. In some specific cases such as self-employed people or investors without enough cash, the usage of deposit bonds can be higher.
It is important to note that not all vendors will accept deposit bonds, and the use of deposit bonds is more common in certain types of property transactions, such as off-the-plan developments and new home constructions. It is also worth noting that the usage of deposit bonds can fluctuate based on the economic conditions, for instance, when the lending environment is tight, the use of deposit bonds may be more prevalent.
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This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.