In a fast-moving property market, many buyers are finance ready but cash constrained. We spoke to Deposit Power’s head of sales and distribution, Nick Rumpff, about how deposit bonds are a smart alternative to a cash deposit, and how brokers can use them to differentiate by removing friction and delivering flexible solutions for clients.
Q. When is a deposit bond a smart alternative to a cash deposit?
To be clear, cash still has its place and is currently the common option – but it’s not always the best option for the client. In the current market there are a lot of buyers who are finance ready but don’t have the cash position to complete an exchange. It’s not about replacing cash altogether – to re-frame it, we’re encouraging buyers, with the help of their brokers, to ask, “what is the right deposit strategy for me?”
Deposit bonds are a smart alternative that is fast, easy, inexpensive and available for those scenarios where using cash upfront is a hurdle.
Q. Is there enough awareness of the potential benefits deposit bonds can bring?
I think deposit bonds are still the best-kept secret in the property market.
There is a level of awareness of deposit bonds with brokers. But we do find that even with brokers who use deposit bonds regularly, we always see an ‘aha’ moment where they go, “I didn’t know you could use it in that particular scenario” [when] we have conversations. They also often don’t realise how easy the application process is or how inexpensive it is.
Q. What buyer profiles benefit from deposit bonds?
There are quite a few common scenarios where deposit bonds are powerful.
The first one is simultaneous settlements. The challenge there is timing. You’ve got a property that you’re looking to sell, or is in the process of being sold, and [this] can often inhibit the buyer’s ability to secure their next property when they find it. A deposit bond allows them to exchange on the next property without needing the cash in their bank account from the proceeds of a sale.
The next scenario we see is first home buyers, in particular first home buyers with parental guarantees. A lot of the time, they’re borrowing up to 100 per cent of the property price, particularly with the government schemes that are in place. [In that scenario] coming up with a 5 or 10 per cent cash deposit at exchange doesn’t really make sense. Being able to use a bond alleviates the need for cash to be put down. They can borrow the amount at settlement and that 5 or 10 per cent cash deposit never needed to exist.
Another scenario that we see is property investors. They’re looking to purchase the next property in their portfolio and might come across a property they’re keen on, but ask, “How do I come up with the deposit? Do I have to refinance one of my existing properties? Do I have to sell one of my existing properties?” A bond allows them to commit to that property, without them needing to [consider all of those options] before exchange.
We [also] see a lot of downsizers [who are] asset rich but cash poor. A deposit bond is really suitable as it allows them to commit to the new property without having to pull money out of their super or sell the house that they’re currently in.
Q. Would a deposit bond work for a buyer purchasing off the plan?
This is one scenario where using a deposit bond is really powerful. The common way to buy off the plan is to come up with a 10 per cent cash deposit. If the property is in one of Australia’s capital cities, that’s probably going to be a million dollars, maybe even $2 million plus. That’s a lot of cash to come up with. [Buyers] then hand that cash over to the developer, it sits in their trust account for the build time, which could be three to five years. And the buyer doesn’t get any financial benefit from that money sitting there.
A bond allows them to do it differently. They pay a one-off bond fee at the start, but they get to keep the rest of the cash with them. So, it gives them peace of mind knowing that the cash is with them, working for them and not with a third party. Buyers have the option to keep that cash working for them in an offset, high-interest savings account or in investments until settlement.
Q. How should brokers introduce the deposit bond concept to their clients?
We see most success when brokers introduce the product early on in the conversation.
It’s [at that stage] that they can learn about the client’s financial position. Offering the solution at that point in time allows the broker and their client to plan the best deposit strategy for them.
Q. What are the real benefits of having deposit bonds in your toolkit?
It’s about being able to offer a really great solution that solves a tangible problem a lot of buyers are facing. And a lot of buyers still don’t know the product exists.
For a broker to be the expert in the market and suggest additional products, such as deposit bonds, is really powerful. It is a game changer.
And it sets them apart from others in the market who might not be offering these solutions.
It allows the transaction, the purchase, to go through quicker, and that’s going to result in a great client experience.
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