Bridging Loan or Deposit Bond?

When selling one property and purchasing another, one of the dilemmas of some first time home buyers are the funds from the sale may not be available in time to use for the purchase deposit. There are typically two options in this scenario: a bridging loan and a deposit bond.

Bridging loan

A bridging loan is a short term home loan designed to allow you to initiate the purchase of a
property before you have sold your previous one.

The lLoans’ terms are often between six and 12 months and bridging loans generally have a
higher interest rate than traditional home loans.

This is can be a great option but carries some risk. It’s important to
know that you will be able to make the repayments even in a worst case scenario where
your old house doesn’t sell as quickly as you’d hoped or where property values may change

It’s important to talk to a finance broker and ensure that you have the capacity to service the loan
for the period of time required.

Deposit bond

A deposit bond is a tool that, upon agreement with a vendor, can replace the requirement of
a cash deposit when purchasing a property.

This is can be a relatively cheap method of initiating the purchasing of a property usually
without the need to liquidate your other assets. The cost of a bond can vary depending on
transaction complexity and the term being sought. In a simple transaction, it is likely to be
approximately 1.3% of the amount of the deposit. For example, for a deposit guarantee to
the value of 10% of a property price for an individual purchasing an established property in
NSW and repaying that guarantee within 6 months on a $50k deposit for a property
purchase of $500k, the fee will be about $650.*

A deposit bond is issued by an insurer to the vendor of the property for either the full or
partial deposit required. At settlement, the purchaser must pay the full purchase price
including the amount of deposit. At this point, the deposit bond becomes void. They
normally cost at least 1.2 percent of the purchase price.*

If the purchaser fails to complete the purchase of the property, the vendor is able to give
the deposit bond to the insurer who will provide them the entire value of the deposit bond.
The insurer can will then seek reimbursement of the deposit bond from the purchaser.

Deposit bonds are generally a fair bit cheaper than a short term loan, but it’s important to
talk to a mortgage broker to compare the two, taking into account your plans requirements
and objectives and your finance situation.

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