Deposit bond

Deposit bonds are a type of Surety bond ― a financial instrument commonly used in Australia as an alternative to a cash deposit. Deposit bonds facilitate residential or commercial real property purchases. They are sometimes confused with deposit insurance, however, deposit bonds are financial instruments that apply to real estate transactions, whereas deposit insurance protects the bank's deposit holdings.

The deposit bond is similar to a forward exchange, wherein the buyer agrees to purchase real estate at an agreed price, using the instrument of a deposit bond in lieu of cash. Both parties agree that the buyer will pay the seller the total sum for the property purchased, including the deposit, on an agreed upon future date, known as the settlement date of the real estate transaction, at which point the purchaser assumes ownership of the real property.

Deposit bonds are designed to assure the seller of the buyer's viable deposit, assuring that it is insured and covered in the event that the buyer fails to fulfill their obligation to the seller.

Assurance

Deposit bonds are an assurance, which is a type of financial coverage that provides remuneration for an event that is certain to happen. Assurance is similar to insurance, with the two terms often mistakenly used interchangeably. However, insurance specifically protects policyholders from events that might happen and provides remuneration to them if and when those adverse events happen. An assurance policy covers an event that definitely will happen, while the insurance policy covers an event that might occur. sakarsrv.blogspot.com

Buyer

Deposit bonds are issued on behalf of the buyer, by an insurer or bank, in the form of a certificate guaranteeing the total sum of deposit money required for a real estate purchase.

Deposit bonds are typically used when a potential real estate buyer's accessibility to their own cash is limited, usually in other investment asset classes.

The funds could be tied up as follows:

- Equity in property
- Asset / property sold, but funds not yet received
- Other investments
- Corporate Stock or Shares
- Inheritance
- Funding delays from financial institution/bank

** The deposit bond is a certificate and only substitutes for cash, but is not cash in itself .Therefore, the buyer pays the full agreed purchase price at a future date including the deposit .**

History

Deposit bonds were introduced in Australia in 1988 by the UK insurance giant, Royal Sun and Alliance, through their Australian-owned company called Deposit Power.

A gap was observed, between the potential buyers wanting to make an offer on a property and the time it took them to organise their money, or access their funding - whether it was through selling of their own assets or investments, or just waiting for bank to finance them in order to make an offer on a property, thus the deposit bond was born.

Banks and other insurance companies followed suit introducing the deposit bond into their product offerings, especially for their mortgage clients. Other Financial intermediaries, such as brokers and financial advisers, have also become part of the supply chain of selling and issuing deposit bonds to the consumer. They are typically authorised to act as agents for an insurance companies or banks.

New Zealand and the United States are the latest markets to embrace the deposit bond in the last few years. In the USA, deposit bonds are known as down payment bonds.

Risk Mitigation

Banks and insurance companies have their own underwriting guidelines in relation to issuance of Deposit Bonds, that people will need to meet.

Underwriting guidelines vary from company to company, but generally the bond issuers look for the following:

asset and liabilities
and / or their ability to gain finance or have finance approval in place

The risk is borne by the issuer of the deposit bond ergo the financial institution or insurance company, on behalf of the purchaser /buyer.

If the buyer fails to fulfill their agreement, the seller is entitled to keep the security deposit which was held as collateral and in lieu of cash for the real estate purchase

Therefore, upon claim, the funds will be paid out immediately by the issuer of the bond to the seller. Being an assurance, the event is covered no matter what, i.e. “the deposit. “

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