A deposit bond is a guarantee that can be used instead of a cash deposit when buying property. This means that the 10% cash deposit that is normally required before settlement can remain in KiwiSaver, term deposit or wherever it is currently sitting, and continue to grow.
Squirrel work with Deposit Power (a division of CBL Insurance) to offer deposit guarantee bonds for first home buyers, residential home buyers and buyers with longer settlement dates.
The situation when a deposit guarantee bond becomes really useful is when there is going to be a long settlement date, for example when buying property off plan which often takes over a year to settle.
Huge savings can be made by using a deposit bond instead of borrowing a cash deposit – but before we get too carried away, we should mention that you need to meet several conditions before being able to take advantage of Deposit Power deposit guarantee bonds:
- Your deposit bond can be up to a maximum of $100,000
- The property you are purchasing must be intended to be owner-occupied
- Deposit bonds are for residential properties only
- You must be a NZ resident
What are the benefits?
If you don’t have cash readily available, a deposit guarantee bond may be cheaper than borrowing short term to cover the deposit.
Many banks will charge an overdraft rate of interest (up to 15%) or at the very best a floating mortgage rate (up to 6.75%.) The cost of a deposit bond is a one-off upfront fee.
Check out the table below to see how a deposit bond fee compares with an equivalent financing rate for a similar term:
|Term||Bond fee||Equivalent Financing Rate up to*|
|< 6 months||2.50%||5.00%|
|6 – 12 months||3.00%||3.00%|
|12 – 24 months||5.00%||2.50%|
* based on utilising maximum term
Here’s an example showing how the fee is calculated:
|Guarantee term:||4 months|
|Total fee collected:||$1,500 (2.50% of $60,000)|
The fee is charged upfront as single one-off fee. It can be charged to your credit card or paid in cash.
What about using KiwiSaver?
From 1 April 2015 KiwiSaver can be withdrawn before settlement provided the deposit is held in trust until settlement.
But, there are a few issues that favour the use of deposit guarantee bonds instead of KiwiSaver:
- it takes about ten days to process KiwiSaver so this wont work for auctions
- if settlement is sometime off it precludes you from increasing your KiwiSaver withdrawal
- it assumes you have all of your deposit available and don’t need to still save some of it.
How much can you save by not using your KiwiSaver for your deposit?
If you are buying off-plan then chances are you wont be settling for at least 12 months. If you are eligible for the First Home Subsidy then staying in KiwiSaver will give you another $2,000 per person subsidy. In 2014 the average return on a growth fund was 8.50% so if you had $30,000 invested that gives you another $2,400 in earnings and assuming a household income of $120,000 then another $3,600 of employer contributions.
All in all that means you could get up to an extra $10,000 out of your KiwiSaver by utilising a Deposit Power deposit guarantee bond.
How to get a deposit bond?
First off we need to get you approved for mortgage finance. We can easily issue Deposit Power deposit guarantee bonds off the back of a finance approval with minimal additional paperwork.
As mentioned above, you need to meet some standard conditions for Deposit Power deposit guarantee bonds like intending to live in the property you’re buying and being a NZ resident. Deposit bonds can’t be used on commercial or investment properties and there is a maximum bond amount of $100,000. We can look at bonds that fall outside of these criteria but that will done on a case-by-case basis.
They can be issued for various terms depending on your settlement date:
- Up to 3 months
- 3 – 6 months
- 6 – 12 months
- Up to 2 years
Squirrel will also make sure the Real Estate Agent understands the deposit guarantee bond. Agents that work on new developments will be aware of deposit bonds. However, as these are new to market there will naturally be a low level of industry awareness for a while.
Can I get a deposit bond through Squirrel if I’m already approved directly with a lender?
Yes, if you are doing a deposit bond less than 12 months. We don’t have to arrange your mortgage but do need to see evidence that you have a mortgage approval already in place.
For deposit bonds over 12 months you must have your mortgage approval with Squirrel. If you are already approved, that’s fine but we’ll need to still do a full mortgage application and have your approval moved over to us. Mortgage approvals last for a maximum of 12 months so it’s incumbent on us to get your approval extended when it first expires.
What do deposit bonds mean for Real Estate Agents?
It will increase the market of potential buyers and make it easier to get buyers unconditional where they don’t have ready access to a 10% cash deposit.
For off-plan sales it’s a no-brainer because the buyer deposit needs to stay in trust anyway until settlement.
For auctions, the agent needs to be aware that they won’t get paid until settlement. Normally a deposit can be distributed 10 working days after unconditional. With deposit bonds the agent and vendor wont receive funds until settlement.
Download our handy Deposit Bonds Advice Sheet
About Deposit Power
A Deposit Power Guarantee allows you to secure your home or investment property when you need to, without having to use your own money until you’re ready to settle….giving you the Power To Purchase. Deposit Power is the largest issuer of deposit bonds in Australia. CBL Insurance Ltd is the largest and oldest issuer of Credit Surety in New Zealand, established for over 40 years, and writing insurance in over 25 countries.