Buying off the Plan? Consider Using a Deposit Bond

Are you considering buying an apartment off the plan, i.e. while the property is under construction or before building has even started? Are you nervous about your deposit being safe while it is in the hands of the developer? You may wish to use a deposit bond instead of handing your cash over at the time of signing your contract.

There have recently been articles in newspapers and on A Current Affair where buyers have paid their 10% deposit to buy an apartment off the plan, but then the builder goes bust or disappears. In cases like this, the buyers become part of the list of creditors and are unlikely to see at least most of their deposit again.

Instead of paying your 10% deposit, you can obtain a deposit bond. A deposit bond, in layman’s terms, is a promise note to the developer that you will have your deposit funds at the time when the property is ready to move into. So you pay no cash to the developer up front. You just give them the deposit bond when you sign the contract and there is no money due until the property is complete.

How do deposit bonds work?

There is an up-front fee which is non-refundable. The fee is based on the term of the sunset date – which is a date mentioned on the contract which is the deadline by which the developer must complete construction. Deposit bonds can be arranged by your broker, conveyancer or your bank.

To use an example:

You wish to purchase an apartment for $650,000 with a sunset date of 2 years from now. Using current pricing, the deposit bond fee would be $3,900.

If the same property had a sunset date of 3 years from now, the deposit bond fee would be $5,850.

The benefits of a deposit bond?

If you were to use your savings to secure the $650,000 apartment off the plan, you would provide $65,000 to the developer. If the developer disappears, you would likely lose that $65,000.

If instead you used a deposit bond, all you would’ve spent was the cost of the deposit bond.

If you have the $65,000 at the time of signing the contract but use a deposit bond instead, you could place the funds into a term deposit for that 2-3 year time period. Based on today’s interest rates, the interest earned during that time could exceed the cost of the deposit bond which means in the end it doesn’t cost you anything at all.

Want to find out more?

If you have any questions, or are thinking of buying an apartment or a house off the plan, give me a call on 0414670151 or email me at jennifer@jblhomeloans.com.au