Buying off-the-plan Part 1: Deposit options
Buying off-the-plan is a common way to purchase property, particularly brand new. It’s also been exacerbated in recent years with the shift of the First Home Owners Grant to new homes.
Competition can be fierce and developers selling 90% of all stock within a day or two of launch is not unheard. As a result, before you even get to the purchasing stage, it’s becoming more and more popular for developers to ask for a refundable registration of interest which can range from $2,000 to $10,000 to sift out those that are ‘just looking’.
Once you’re in and have found the apartment of choice, to buy off-the-plan the developer generally requires 10% deposit on the purchase price and there are three common ways to fund this depending on the developer:
- Deposit Bond
- Bank Guarantee
Cash is obviously the easiest if you have it but make sure you try to claim the interest on it especially if you’re not due to settle for a long time. Some developers will keep all interest earned on your 10% deposit whilst some will give you a half share.
If you’re not as cashed up as fellow purchasers, and believe me there are plenty around, there’s the option of getting a deposit bond which is essentially a substitute of the cash deposit. In simple terms, its an insurance policy to the developer that they’ll receive the 10% irrespective. Some deposit bonds can be used for up to four years but getting one isn’t always easy, particularly those that are for a longer term, 18 months+.
The deposit bond can be guaranteed by a mix of existing equity in other property (e.g. your PPOR Principal Place of Residence), shares or term deposits. However, the deposit bond issuer may specify a minimum percentage of the bond to be covered by property e.g. 50% and the rest from shares/cash. In addition, if you were applying for a deposit bond of say $50,000, then you’ll be required to have at least four times (sometimes more) that in equity. That is, your PPOR or other investment properties must have equity in excess of $200,000.
If you meet all these criteria then there’s a service fee of around $5,000 for a $50,000 deposit bond over a 36 months term.
As you can see a deposit bond is really not an option for first home buyers but a bank guarantee may be more fitting. A bank guarantee as its name suggests is guarantee from a financial institution will cover the debt if the debtor fails to do so. Like a deposit bond, no cash is actually exchanged with the developer but rather they receive a guarantee from the insurer/bank that they will be paid when the funds are called for.
The deposit is locked away as a term deposit where you can vary the investment terms and receive all interest paid. There’s generally a small establishment fee of a few hundred dollars plus an ongoing annual fee of around 1.5% per annum on the guarantee amount. Using $50,000 as an example, over 36 months, a bank guarantee will cost roughly $2,500 which is by far more economical than a deposit bond.