Sydney first home buyer Luke Handren found his first opportunity to break into the housing market when it cooled in 2017.
But the 26-year-old – like most first timers – didn’t have enough for a deposit to buy a $550,000 apartment in Pendle Hill in Sydney’s west and while his family was willing to help him out through the use of equity from their assets in regional NSW, the now much longer bank processes required to cash-out on these assets meant he would miss out on the purchase.
That was when he started using deposit bonds, a guarantee issued by insurers allowing buyers to defer the payment of a deposit until settlement.
If a purchaser fails to close the purchase at settlement, the vendor claims the 10 per cent deposit guarantee from the insurer.
As deposit bonds worked best for people with enough asset wealth, Mr Handren was able to piggy-back on his family’s portfolio a second time and using another deposit bond, bought a house in Kellyville to live in with his partner. He separately secured loans to settle both purchases.
“I am just a young bloke trying to make something of himself,” he said.
“If I didn’t have access to deposit bonds, I would have tried to borrow money [for the deposit] off my parents but I was trying to avoid that, so I can do things on my own and meet the fees myself.”
While the market for deposit bonds is small, providers such as Deposit Power are seeing an accelerating growth in demand mainly due to increased bank processing times and tighter lending standards since the banking royal commission and the rush of first homebuyers without a ready deposit trying to take advantage of cooling markets.
Deposit Power’s Grant Bailey says he has seen his business grow 12 per cent in the last quarter of 2018, mainly from parents trying to help out their children. The company issues about 1000 bonds each month.
The company charges about 1.3 per cent for each deposit every six months.
“We are finding strong growth in buyers who want to secure a property within the timeframe required to arrange what can be a large cash deposit or being forced to sell as asset to cover the amount in the short term,” Mr Bailey said.
“Often the parent does not want to sell an asset or secure a loan on the equity they have built up in their property to pay the deposit so a deposit bond is a great solution.”
Separately, Deposit Power has partnered with a new insurer provider Lombard late last year, after its existing insurer Auckland-based CBL Insurance went into interim liquidation. Mr Bailey said existing clients were able to seek out alternative guarantees following the CBL fall over.
Real estate agent Raine & Horne’s Ric Serrao also says nearly 30 per cent of his Sydney clients have started to use or ask about deposit bonds. Many of Mr Serrao’s clients are in their 30s to 50s, are “asset rich” but have little cash.
Purchasers must demonstrate they have the financial capacity to purchase the property with formal loan approval or a sale of an existing property before they can be approved with a deposit bond.
Outside of deposit bonds, brokers have also come up with other kinds of deposit-free products.
Online mortgage broker HashChing is offering deposit-free loans of up to $1.2 million to tertiary educated borrowers earning $150,000 or $180,000 as a couple on the back of funding secured from local non-bank group.
This licensed article was first published in the Australian Financial Review 8th May 2019
Author Su-Lin Tan – Reporter
Copyright 2019 The Australian Financial Review