Deposit Bonds- Please educate me

hi all.
There is a purchase I am keen to make that is unexpected. The property is going to auction, and it will be a great bmv buy if I were to get it for what I want.
Problem is, as this wasn't expected, I don't have time to do an equity cash out to have time for the cash to be in my hand for auction day next weekend.

Can anybody explain how deposit bonds work? What happens if for some reason you don't settle?

 

Deposit Bonds are normally issued by an insurance company. They won’t issue one without your finance being approved first. They promise to come up with the deposit in cash to settle if you cannot. But in that event, the insurer who issued the bond will come chasing you for the money.

 

It is possible to get them without finance via DBA (Deposit Bonds Australia).

The other major player in the market "Deposit Power" just went belly up so that will be interesting to see the potential fall out.

 

The major deposit bond company is also in administration too.

 

Ok that would work! I will have conditional approval within 4 days if I send back the docs monday

 

Actually, It would be too risky for me. My valuation could come back low on the cash out and I would be screwed! I will have to sit this one out unfortunately

 

The use of a deposit bond is typically the best scenario when you are borrowing more than 90% of the purchase price and you are unable to negotiate a lesser deposit, or, you don't wish to use your own funds for payment of the deposit.

A deposit guarantee typically involves a double indemnity. If you default under the Contract, (entitling the Vendor to terminate the Contract and forfeit the deposit), the guarantor will account to the Vendor for the amount stipulated in the deposit bond (usually 10% of the purchase price). The guarantor will usually then pursue the purchaser for the guaranteed amount.

Deposit Power has, for many years been the main player in the deposit bond industry. The underwriter of these bonds, CBL Insurance, have recently been placed into administration in NZ. They are no longer issuing deposit bonds and the status of the bonds already issued is questionable.

Deposit Assure is an acceptable alternative and is underwritten by QBE Insurance.

 

In Victoria, it is not common to use deposit bonds. You will need permission from the vendor, prior to aiming the contract/winning the auction, to use it. Many won’t agree, because it prevents them from obtaining the deposit funds prior to settlement. If there is little interest in the property, the vendor will probably agree.