Understanding Deposit Bonds: How They Work for Australian Property Buyers

Saving a 10% deposit is one of the biggest hurdles for property buyers in Australia, but what if you could secure a property without having the full deposit in cash? A deposit bond (also called a deposit guarantee) allows you to do exactly that. Instead of handing over tens of thousands of dollars at exchange, an insurance company guarantees the deposit on your behalf — giving you time to access your funds before settlement.

This guide explains how deposit bonds work, when they make sense, what they cost, and the risks and limitations you need to understand before using one.

What Is a Deposit Bond?

A deposit bond is a guarantee issued by an insurance company (or authorised financial institution) that promises to pay the vendor the deposit amount if the buyer fails to complete the purchase. It serves as a substitute for a cash deposit at exchange of contracts.

Importantly, a deposit bond is not a loan. You do not receive any money, and no interest accrues. The insurer is simply guaranteeing that the deposit will be paid if you default. If the transaction completes normally, the vendor receives the full purchase price (including the deposit component) at settlement from your lender, and the deposit bond is never called upon.

How Does a Deposit Bond Work?

Short-Term vs Long-Term Deposit Bonds

There are two main types of deposit bonds, and the one you need depends on your settlement timeline:

Short-Term Deposit Bonds (up to 6 months)

Designed for standard property purchases where settlement occurs within 6 months. These are the most common type and are suitable when:

• Your deposit funds are in a term deposit, offset account, or share portfolio and you do not want to liquidate early
• You are buying before selling your current property and need your equity released at your own settlement
• Your savings will reach the deposit amount by settlement but are not quite there at exchange
• You want to keep your cash earning interest or invested until settlement

Long-Term Deposit Bonds (6 months to 5+ years)

Designed primarily for off-the-plan purchases where settlement may be years away. The developer requires a 10% deposit at exchange, but you may not want to tie up cash for 2-3 years while the building is being constructed. Long-term bonds provide the guarantee for the entire period until settlement.

Long-term bonds require a more rigorous assessment and typically cost more than short-term bonds, as the insurer's risk exposure is greater over the longer period.

How Much Does a Deposit Bond Cost?

The cost of a deposit bond is a one-off premium, typically calculated as a percentage of the deposit amount (not the purchase price). As a guide:

• Short-term (up to 6 months): Approximately 1.3% of the deposit amount
• Long-term (6-48 months): Approximately 1.3% to 4% of the deposit amount per year, depending on the term

For example, on a $800,000 property with a 10% deposit ($80,000):

• Short-term deposit bond: approximately $1,040
• Long-term deposit bond (2 years): approximately $2,000 to $3,200

When to Use a Deposit Bond

Deposit bonds are most useful in the following situations:

Buying Before Selling

If you have found your next property but have not yet sold your current home, your equity is locked up. A deposit bond lets you exchange on the new property while your existing property is still on the market. At settlement, you use the proceeds from your sale (or bridging finance) to complete the purchase.

Off-the-Plan Purchases

Developers typically require a 10% deposit at exchange, but settlement may be 18 months to 3 years away. A long-term deposit bond avoids tying up $50,000 to $100,000+ in the developer's trust account for years where it earns minimal (if any) interest.

Auction Purchases

At auction, the successful bidder is usually required to pay a 10% deposit on the day. If you do not have the cash available, a deposit bond can be presented instead — but you must arrange the deposit bond before auction day. You cannot arrange one on the spot.

Funds Tied Up in Investments

If your deposit is invested in shares, managed funds, or a term deposit with a penalty for early withdrawal, a deposit bond lets you exchange without liquidating your investments at a bad time.

Vendor Acceptance Issues

Some vendors (and their agents or solicitors) prefer cash deposits because:

• A cash deposit in the trust account provides tangible security
• Some vendors are unfamiliar with deposit bonds and perceive them as risky
• If the buyer defaults, claiming against a deposit bond involves paperwork and waiting, whereas forfeiting a cash deposit is immediate
• Some contracts specifically require a cash deposit

Risks and Limitations

Deposit bonds are a useful financial tool, but they come with risks you should understand:

• You are still liable: If you default on the purchase and the vendor claims against the deposit bond, the insurer pays the vendor — and then recovers the full amount from you. You do not avoid losing the deposit; you simply defer the payment method.
• Non-refundable premium: The fee you pay for the deposit bond is gone regardless of what happens. If you withdraw during cooling-off, the premium is not refunded.
• Not all vendors accept them: As discussed above, vendor rejection is a real possibility.
• Pre-approval required: Most deposit bond providers require evidence of finance pre-approval. If you cannot demonstrate your ability to complete the purchase, you will not be approved.
• Does not help with settlement funds: A deposit bond only covers the deposit at exchange. You still need the full purchase price available at settlement through your lender.

Alternatives to Deposit Bonds

If a deposit bond is not suitable or the vendor will not accept one, consider these alternatives:

• Deposit guarantee from your lender: Some banks offer deposit guarantees as part of their home loan package. This works similarly to a deposit bond but is backed by the lender rather than an insurer.
• Bridging finance: A short-term loan that covers the deposit (and potentially the full purchase) until your existing property sells. Bridging loans are more expensive than standard mortgages, with higher interest rates and fees.
• Reduced deposit negotiation: In some cases, you can negotiate a lower deposit amount (e.g., 5% instead of 10%) directly with the vendor. This is more common in private treaty sales than at auction.
• Family guarantee: A family member uses equity in their own property to guarantee part of your deposit. This avoids the need for a deposit bond but carries risks for the guarantor.

Related Resources

• Home Loan and Finance Guide — Understanding your mortgage options
• Stamp Duty Calculator — Calculate the full cost of your property purchase

This guide is for general information only and does not constitute financial advice. Deposit bond products and terms vary between providers. Always consult your conveyancer and financial adviser before proceeding with a deposit bond.