For buyers considering an off-the-plan property, the deposit can be one of the biggest practical hurdles. A 10 per cent commitment on a $1 million apartment means finding $100,000 today, even though settlement may still be several years away. For downsizers, investors and buyers whose wealth is tied up elsewhere, that can force financial decisions long before they would otherwise need to make them.

In a recent conversation with Apartments.com.au’s Mike Bird, Deposit Power Head of Sales & Distribution Nick Rumpff explains how deposit bonds offer an alternative: rather than handing over the cash deposit at exchange, eligible buyers can use a bond and retain their capital until settlement.

A different way to fund an off-the-plan deposit

Deposit bonds are not new. Deposit Power has been operating for 35 years, yet Rumpff says awareness among property buyers remains relatively limited. Their relevance becomes particularly clear with off-the-plan purchases, where buyers may be committing to a home two, three or four years before completion.

For downsizers, that gap between purchase and settlement can create an awkward question: where does the deposit come from? Selling the family home early could mean moving into temporary accommodation while construction is completed. Refinancing can mean taking on additional debt, while using savings, an offset account or superannuation means giving up access to capital, and potentially the returns it could generate, for several years.

A deposit bond changes the timing. The buyer retains their cash during construction and pays the full purchase price at settlement. As Rumpff puts it, the product can allow downsizers to “commit sooner and with more confidence” without first having to sell the home they currently live in.

The financial equation for buyers

There is also a financial calculation behind that flexibility. Rumpff uses the example of a $1 million off-the-plan purchase with a $100,000 deposit and a four-year construction period.

Deposit Power's fee, based on the figures discussed in the podcast, is calculated at three per cent per annum on the deposit amount and paid upfront. Over four years, that would make the bond fee $12,000.

If the same $100,000 remained in an offset account and generated or saved the equivalent of around six per cent a year, Rumpff estimates the benefit over four years at roughly $24,000. On those assumptions, the difference would be around $12,000 in the buyer's favour after accounting for the bond fee.

The equation can become more significant as purchase prices rise. Rumpff gives the example of a recent buyer purchasing a penthouse on Sydney's Lower North Shore who chose to leave more than $500,000 in superannuation for an additional three years rather than placing the money into a trust account as a cash deposit.

That also challenges one of the misconceptions around deposit bonds: that they are primarily for buyers who don't have the money. According to Rumpff, Deposit Power sees buyers who have sufficient cash but prefer to keep it working in investments, savings, superannuation or an offset account until settlement.

An alternative for property investors

Investors can face a similar issue. Someone with several properties may have substantial equity but comparatively little cash sitting idle. Accessing that equity through refinancing can take time and introduce additional borrowing costs.

In the podcast, Bird and Rumpff contrast a typical mortgage rate of around 6.5 per cent with Deposit Power's stated three per cent annual bond fee. The actual benefit will naturally depend on the buyer's circumstances, the bond term and what they would otherwise do with their capital.

The application itself is designed to be relatively quick. Rumpff says it generally takes about 10 minutes to complete, with approval and issuance often occurring within 24 hours.

For an owner with an existing property, Deposit Power assesses the equity available in that property as part of determining whether the buyer is likely to be able to settle. Rumpff says the company does not take a lien or upfront security over that property as part of the process.

What deposit bonds mean for developers

For the development industry, the other side of the equation is whether a deposit bond will be accepted as part of an off-the-plan sale.

Rumpff says deposit bonds are widely accepted across the market, although buyers should confirm acceptance with the developer before proceeding. Where a developer is less familiar with the structure, Deposit Power can provide further information about how the bond operates.

The conversation also points to their role in satisfying qualifying pre-sale requirements, an important consideration for developers working towards construction finance. According to Rumpff, major lenders and non-bank lenders are familiar with the product, reflecting its long history in the Australian property market.

For developers, that potentially makes deposit bonds more than simply a buyer finance tool. By reducing the need for purchasers to liquidate investments, refinance existing property or sell their home well ahead of completion, they can remove one of the barriers standing between buyer interest and an exchange of contracts.

Ultimately, a deposit bond does not remove the buyer's financial obligation. The full purchase price still needs to be paid at settlement. What it changes is when capital needs to move.

For downsizers, that could mean remaining in the family home until their new apartment is ready. For investors, it could mean avoiding an early refinance. And for developers selling projects several years from completion, giving buyers another way to bridge the period between exchange and settlement could help turn financial readiness into a more flexible proposition.

Read more: #119 Closing the Commitment Gap: Deposit Power’s Nick Rumpff on Deposit Bonds for Property Developers