What is a 'deposit guarantee'? Property investment terms explained
A deposit, regardless of the value of the property, can be a hefty sum that you might not have on you straight away. For those dipping their toes into particularly competitive markets, when the cash isn't readily available, a deposit guarantee might suit you.
However, it's easier to describe a deposit guarantee as what it is not, rather than what it is. It's not a replacement for your actual deposit, and it's also not attainable if you can't afford the deposit in the first place.
Instead, it's an option for those who are perhaps asset rich but cash poor, or whose cash is being used elsewhere.
For instance, you're still waiting for the settlement on a property that is being sold, or you have a fixed term deposit account that you'd rather hold onto while you wait until settlement. Instead of using a cash deposit, you can use a deposit guarantee as an alternative.
Another benefit is for first home buyers who may not be able to afford the deposit without an applicable government grant, that cannot be accessed until settlement. While proof of eligibility for the grant will need to be provided, this is certainly a highly advertised way of accessing these funds early.
You may have seen a deposit guarantee referred to as a 'Deposit Protect Bond' (St George Bank and Westpac) or even a Deposit Bond (ANZ).
The market for deposit guarantees was established in 1989 by Deposit Power, of CBL Insurance Ltd, a company that operates today. Deposit guarantees are legal in every state and territory, and Deposit Power notes that they have assisted in over 750,000 transactions. They refer to the product as a Deposit Power Guarantee.
What are the limits?
The Commonwealth Bank notes that they are usually available, in short term form, for up to six months - and they note they're particularly useful as deposits for properties you win at auction.
There are also long term versions available from six to 48 months, that they note suit better for those purchasing off the plan - so that capital will not be caught up in the meantime. This means you don't have your cash held up, unable to be used by yourself for other short-term investments, while the property is built.
Unconditional loan approval is usually required to get a deposit guarantee, and you will usually only be allowed up to 10% of the purchase price, often to a total property value limit determined by the individual provider, such as $750,000 (Commonwealth Bank).
Applications tend to be fairly quick - provided the right paperwork, there can often be as short as a one working day turnaround.
Can everyone use them?
Not everyone can have access to a deposit guarantee. You still need to pay the full purchase price at settlement, so you must be able to afford it. A deposit guarantee is not a substitute for having enough funds to purchase, and you will need to prove that you can afford it.
You will be required to bring along a copy of the Contract of Sale for the property you are interested in, a copy of a loan approval, evidence of the funds that will be used (such as, a copy of the contract of sale from another property) and a copy of any grant letters.
Some deposit guarantee offerings exclude different types of property, usually rent to buy and private finance, however some allow and some disallow properties such as commercial and vacant land to be granted a deposit guarantee. It's worth shopping around to check eligibility before determining on a provider. ANZ, for instance, requires the property to be zoned residential.
Similarly, different asset tests are undertaken. For instance, Long Term Guarantees from Commonwealth Bank require substantial equity in a current property or property portfolio. Short term guarantees require evidence of funds to complete the purchase and, usually, an unconditional loan approval.
They can usually be obtained in trusts, individual names or as a corporate entity, including first home buyers and retirees. However, non-Australian citizens cannot apply.
Other worthwhile considerations
While deposit guarantees have become increasingly mainstream, they're still not completely well known. It is at the discretion of the vendor as to whether they accept a deposit guarantee. Adjustments may need to be added to the Contract of Sale, for instance Aussie Home Loans recommends a 'Suggested Special Condition' is inserted, amending the deposit provisions to allow a guarantee to be used.
It's also worth noting that providers usually receive a commission for providing you a deposit guarantee, and it's not free for you. There is usually a fee associated with being given access to this product (although if unused within a time period, refunds regularly apply), however it tends to be around a one off fee of a few hundred dollars for smaller deposits. Ask about the fees, and always consider the longer term impact in advance. Some banks ask for an initial fee, and then an ongoing fee that may be calculated similar to interest. This can vary dramatically from lender to lender.
Also ask about the provider of the deposit guarantee. For instance, ANZ uses QBE Insurance (Australia) Ltd.
It's also worth bearing in mind that if you pull out of settlement last minute, against the contract, you will still be required to pay the deposit back to the provider of the deposit guarantee. Treat the deposit guarantee as you would your own cash.