The approval of a record-high deposit bond is being attributed to several market trends, including steep property prices, the prevalence of “upsizers”, and more demand for credit.
Deposit Bond provider Deposit Power has announced that it has approved a record $1 million deposit bond, which it said was required to purchase a $10 million property in metro Sydney.
Deposit Power also said that a $600,000 deposit bond was also approved in the same week, adding that these amounts have exceeded the average deposit bond, which is usually less than $100,000.
According to the deposit bond provider, in both instances, the purchasers were upsizing and required a deposit bond to offset their cash being bound in equity in their existing properties.
The high deposit bonds have been attributed to a range of factors, including high property prices.
For example, Deposit Power general manager Grant Bailey said that the size of the bonds has reflected a growing trend of larger deposits, driven by factors other than just increased demand for credit amid continued low interest rates.
He said: “There is a noticeable change in the level of industry awareness for deposit bonds and their benefit, fused with increased client receptiveness to alternative funding solutions.
“This is compounded by property prices being at a record high in many areas as well as the prevalence of upsizers, who are often prepared to pay substantial ‘overs’.
“Accordingly, the amount required for a deposit, combined with many lenders’ conservative loan-to-value ratios (LVR), necessitate a much larger deposit.”
Ray White Lower North Shore Group senior sales adviser Stewart Gordon said that a “sustained” supply and demand issue in the housing market has pushed property prices to “unprecedented” levels.
“The knock-on effect is that people are taking far bigger jumps to get into their next home,” Mr Gordon said.
“For instance, it’s not uncommon to see people start with, say, a $2 million property, consider upgrading to a $3 million property, then end up settling on a $5 million property.
“Purchasers also typically prefer to find their next house before selling their current home, which often places a lot of immediate pressure on securing a deposit quickly.”
Raine and Horne Double Bay principal Ric Serrao echoed these views, stating that he has noticed that deposit bonds have become increasingly prevalent for clients requiring a deposit for increasingly expensive properties, particularly if they are in time-sensitive situations.
“This also applies to the influx of expats returning home who typically seek upper-end homes in affluent suburbs,” he said.
However, Mr Bailey said that he believes that the market could begin to recorrect in the fourth quarter of 2021.
“My expectation is that the current strong market, where we have seen double-digit growth in the past nine months, will taper off and possibly flatten due to the expectation that more stock is likely to come onto the market in spring,” he concluded.
This article republished with permission first appeared in The Adviser on 19 May 2021.