Deposit bonds are an excellent method to pay the deposit for off-the-plan purchases provided the vendor accepts them and they are actually available on the particular development.
Each development needs to be approved by the underwriter of the deposit bond. Until recently, only developments with contract terms of 18 months or less were acceptable and this excluded the large number of developments with contract terms of two to five years. However, more underwriters who are prepared to issue bonds for these longer terms have now entered the market.
As we explained above, deposit bonds are essentially an unsecured guarantee to the vendor that the deposit will be paid on settlement. They must be taken out for the maximum term of the contract. This term is determined by what is referred to as a sunset clause that is in the contract of sale. The sunset clause refers to the period of time that can elapse before the purchaser can rescind the contract if the vendor is not able to honour it. Most developers allow a grace period after their expected completion date to provide for construction delays, title office delays or any other unforeseen circumstances. This can extend the term of the contract one or two years beyond the anticipated completion date and an investor would need to pay for this extended period.
As already noted, deposit bonds have to be paid for in advance and for the maximum term of the contract. This fact, combined with the higher fees charged for a bank guarantee; makes a deposit bond a more expensive option than a bank guarantee. The other advantage of a deposit bond for an investor, is that it is unsecured.