What are deposit bonds and how do they work?

When buying property, most contracts require a 10% deposit to be paid at the time of exchange. But what if the buyer doesn’t have cash available straight away? That’s where a deposit bond can come in.

A deposit bond is a financial guarantee provided by an insurer. It acts as a substitute for the cash deposit at exchange. Instead of transferring money, the buyer gives the seller a deposit bond certificate. This confirms that the bond provider will pay the deposit if the buyer fails to complete the purchase – offering security to the seller.

Deposit bonds are not loans. There’s no interest payable, and the buyer doesn’t have to repay the bond amount (unless they default on the contract). Instead, there’s a one-off premium, which is usually based on the deposit amount and the term of the bond. They are available through some lenders or insurers.

These bonds are most commonly used by buyers who have funds tied up in assets – for example, those waiting for proceeds from the sale of another property or preferring to keep their deposit in an offset account until settlement. First-home buyers may also use them if they have a formal loan approval but not yet the liquid funds for the upfront deposit.

The term of a deposit bond generally matches the expected settlement date – anything from a few weeks to a few months. It’s important that the bond remains valid through to settlement, otherwise the seller may request alternative security. For off-the-plan purchases, longer-term bonds (sometimes up to 48 months) may be available.

Not all vendors or agents accept deposit bonds, so it’s essential for buyers to check before committing. However, when accepted, deposit bonds can be a flexible and convenient option – especially for buyers who are financially sound but temporarily short on cash.