Deposit bonds explained: how to buy property without an upfront cash deposit

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And the big difference is that you're not actually finding cash, your own cash and sending it into a trust account, handing over what can be a substantial amount of money for a period of time where that cash can be working much, much harder for you. This is a podcast by The Rask Group. It's for educational purposes, so please do not make a financial, legal, investment or taxation decision based on solely what you hear in this show. Welcome to the Australian Property Podcast. We're on a mission to be Australia's most trusted property podcast. I'm Owen Rask, founder of The Rask Group. I'm Pete Borgent, author and buyer's agent. I'm Amy Linardi, and I am. I'm a buyer's agent. I'm Chris Bates, ex-financial planner and mortgage broker. Together, we'll take you through every step of your property journey. From first homebuyer to decades of property investing. Hey, Ryan, welcome to this episode. Thanks for having me. It's going to be good to talk about something that's going to be new terrain for a lot of the viewers and listeners today. Lots of property investors, investors in the room, first homebuyers, lots of people with property portfolios that are well-established, or people looking to upgrade like myself. Yeah. Maybe fishing for some free advice here. Not really, but maybe. You never know. Today, we're going to be talking about deposit bonds and how they can be used as part of a strategy, as an instrument in what people are doing with property, no matter what they're doing, really. Ryan, you've been in the industry a while. We're talking about something new here, which is. It's deposit bonds. I'd love for you to just tell us, just give us the bird's eye view. Who is Deposit Power and why are we talking about this today? So Deposit Power provide deposit bonds in Australia. Deposit bonds have been an instrument that been around for over 30 years, and it's been a part of the transaction process in Australia for that time. We've been providing deposit bonds for many years to over a million customers. We are double A minus S&P rated, so extremely secure, same as the big banks in Australia. And we are backed up by deposit bonds. And we are backed by a significant insurer called HDI that makes us really trustworthy and secure. Yeah. Super important as we'll get to in the episode. Yeah. So then we're talking about this idea of having a deposit bond. Yeah. Let's start at the ground floor. What is it? So deposit bond is a financial guarantee that replaces the traditional cash deposit when you are exchanging on a property, which basically means that the buyer will settle the full amount of the property at, let's say, $1,000 or $1,000. Yeah. So that's what we're talking about in this case. So you're talking about the deposit bonds, right? Yeah. So you're talking about the deposit bonds. Yeah. Yeah. back and forth and the application process and the kind of the hoops you have to jump through to get either a bridging loan or to refinance your property or to sell an investment property in order to free up the physical cash can delay your opportunity to buy. It costs money and it also kind of depletes your overall investment portfolio. So this is kind of the process bit. Getting a bond is much simpler. And then there's the actually making your money work harder for you. So for someone buying off a plan, for example, so if you're an investor buying off a plan at the moment with the government changes, it's the best way to invest. There is some real significant savings in buying off the plan using a bond versus your own cash. So if I give you an example of buying a $1.2 million property, let's say you've got a four year settlement date for a new build, which is not unheard of, and you need $120,000 deposit to exchange and secure that property. If you hand over that money, it's doing nothing for you for four years, and you may have had to extract it by selling a property, which has got tax implications. If you use a bond, you can keep that money in your super, which is still accumulating and over a four year period could earn close to $30,000 in returns just from that money sitting in your super. Alternatively, you may have that as an offset. So if you think about current mortgage rates, if you have that an offset for four years, you're saving over $30,000. In mortgage repayments over that four years. So it's both accretive in terms of making your money, but it's also saving you a lot of money depending on what you do with that cash. And for viewers, you'll be able to see this, but for people that are listening, we'll walk you through it. You've actually got a calculator on the website that allows people to figure this out for themselves. So you said if my purchase price is $1.2, I'll just pop this in here in the calculator. So 1.2. The big one with this, just as we go through it, is that a lot of people do lock their money up in waiting for the bill to take place or whatever the case may be. And we can see here that the bond amount might be $120,000. We're going to put that over 48 months. There it is. And we can see, you know, it automatically pulls in the latest average for savings. Yeah. Accounts and home loans. And you can see the saving there. So saving of $16,800. Probably the thing that people can't see, and maybe a good follow-up question to this is then, this all sounds really good. How do you guys make money from this? Yeah. And you can see that on the calculator. So there, the, you know, I spoke earlier about the overall benefit of around $30,000, which you can see in the interest savings and the offset. The way that we make money, is that we charge a fee for us guaranteeing that you'll pay the deposit. And that's just a one-off fee. So there's no interest rate. You pay it once and then it's done. Because it's not a loan. It's not a loan. It's a guarantee. So like an insurance product effectively. And so once you've paid that fee, you are covered for the full period of time. So the four years that the vendor knows that you will be able to settle at that point in time, and you can keep your cash working for you. And the, obviously the net benefit is you can see on the calculators $15,000 over that, over that period in time, less the fee. Yeah. Yeah. It's, yeah, it's, it's almost as if, you know, it's too good to be true in that it's, it's going to save you money by doing this. Yeah. But you also have more flexibility of whatever else you've got going on in your life. Because this is actually, I'm assuming that this doesn't actually factor in things like capital gains tax that you might pay on selling investments or other things going on that are a by-product of trying to define your broader financial strategy just for a deposit or just for whatever it is that you're doing with your property portfolio. And especially now, we're chatting off air about recent tax changes and negative gearing and these types of things with people looking at new builds, which is what the government's trying to incentivize us to do. The common concern amongst people that invest that way is that it's going to be a few years, I'm going to have my money tied up, there might be project overruns, all these types of things, right? Yeah. Check responses, setup required compatibility and availability varies 18 plus. Yeah, that's exactly right. So if you are an investor, you are thinking about your portfolio overall and how you get the best possible returns over time for that portfolio. And you're exactly right. One thing is even if you have a date, a sunset date, as we call it, in terms of when it's due to be complete, which is four years time, you can plan around that and you can use your cash to work a lot harder for you. But in the current environment, kind of the blowout on build times can be quite significant. And that's because supply, supply chain constraints are, I think everyone knows is an issue in new builds at the moment. And there's not a lack of demand. There's not a lack of opportunity to actually build. The government are incentivising that through rezoning and all those sorts of things. But the reality in terms of being able to complete on time, I think is difficult for new home builders at the moment. So there is some more inherent risk on overrun. So if you do put your cash in and you think it's going to be there for four years, it could be there for five or six years essentially at the moment, which, you know, just compounds the opportunity cost of having that cash working for you. For sure it does. Yeah. I mean, there's so many things I want to follow up with here, but one of them is when I was doing some research for today's show is how it actually works. If I'm going to come to the Deposit Power website and do this thing where, you know, get a deposit bond and then go off and do something with it, I didn't realise it's actually on your phone. It reminds me of like an Apple Pay type thing where you can get it and you carry it with you. Can you talk about maybe the application process and why that's really important in certain circumstances? I'm thinking like someone that's going to an auction, for example. Can you walk us through that? Yeah, absolutely. So at a kind of a high view, high level view in terms of what do we look for when we're looking to guarantee this for somebody is we just get comfortable that we know that you're going to be good for the full price of the property at the point of settlement. So we'll look at quite simple things like the equity that you have in your current property or in investment properties. Also, if you're already pre-approved for a mortgage, you are absolutely approved by us. So when you come to the website to apply, you apply online, there's a number of questions that we'll ask around your financial situation. But the main hurdles for us, which gets you a really quick approval is this idea of your ability to pay a settlement. And if you've got equity in your property and you're already mortgage approved or either of those two things, we'll approve you straight away. So it can be a very, very quick application and approval process. If it's a little bit more complicated and we need a bit more information, your application goes through our platform. One of our customer service team will call you up and ask you for whatever additional information we need to be able to approve the bond. Typically, the longest time we take is 24 hours to approve a bond. Sometimes it can be instant within minutes if you've got either of those two things that I mentioned. When you apply. And that's a really good example you talked about with auctions, because I guess the challenge around auctions as a buyer is being ready to buy at any given point in time. And in order to do that, if you're not using a bond, you have to go and get a bank guarantee. You have to know exactly how much you're willing to put down for a deposit that bank guarantee covers. It can take a few days to get it from the bank. It's got to be a physical thing. It costs you a thousand dollars to get it. And it's inflexible in terms of your ability to use at an auction if you end up paying more or less than you planned. Also, it doesn't allow you to act quickly. So a lot of people who are ready to buy and are looking at auctions, if they see a house come up that's going to auction that they missed previously and they want to go and bid for it, they wouldn't be able to do it on the same day or the day after because the bank guarantee process takes too long. So with us, you can, if you see a property on Friday that you want to go and bid for on Saturday, you can apply online. Um, you'll get approved within minutes if you've got the information that you need. Um, the bond is delivered to your phone, as you mentioned earlier. So you have the physical bond on you, which is kind of so modern for me. I was thinking about it. I was like, well, it makes sense. Yeah. Yeah. It makes total sense. And I think it's, you know, in, in the digital age, I suppose even talking about it makes me sound old, but, um, uh, I think there's an expectation that you have the flexibility and the instant ability to be able to go and transact. And I think in property, that's typically not the case. It's totally not the case, right? Yeah. Like everything is this kind of black box in it, it seems. Yeah. And it's drawn out and it's kind of the experts know better and kind of tell me what to do. Relationship driven. Yeah. Correct. Yeah. Yeah. Correct. Um, so, you know, for auctions, it's a, it's a great instrument because you can turn up to as many auctions as you want. You can turn up the day after you have a bond that's ready to go. Um, you have to sign the contract on the spot. You can sign the contract with the bond. If you have to update the amount of the bond, because you've paid a little bit more or less, we can do that instantly. Uh, and then that's provided back to your phone. You can give it to the auctioneer and you're, you're done on the day. So you know how at an auction, you go back into the room, you typically go into like one of the rooms at the house and you discuss some things with the auctioneer and that type of thing this is where i might slide the the phone across the table and be like here's my deposit power deposit bond yeah and they go fantastic yeah that's exactly right and so if it's cash so all contracts um as standard in australia have an option for a deposit bond they've been around for a very long time um typically it's crossed out and the cash box is ticked yeah because that's just the way people are used to doing it um but if you have a deposit bond you have the contracts in front of you at an auction or even if it's settling normally all you got to do is change the cross to a tick cross out cash and you can transact so this is it's an accepted form of deposit it's just not used as much as we'd like but maybe they have and i'm sure you're hoping this maybe they have a bit of a comeback here because all the things that we've just mentioned with like policy changes the way people are going to invest more often going forward how convenient they are so on and so forth you know i've um i've been in this game long enough ryan that um i know the difficulties of getting like an afsl because we have one ourselves as well to give financial advice right yeah it took me many many many years to get that and you guys have one as well yeah we do yeah but you also go well beyond that because of what you do in transacting with people effectively yeah is you you're effectively a guaranteeing a sum of money which is substantial yeah oftentimes as we saw on a calculator before you know you're not going to be able to do that because you're not going to be successful it could be you know many years into the future yeah can you talk more to us about i guess how deposit power um is constructed how you guys are quote-unquote safe like just talk just i guess pull apart some of those myths or concerns people might have yeah um i think the one of the first things um to talk about is that we are not giving you cash yeah so it's not a cash product um which in itself has some risks associated to it um the second thing is you mentioned that afsl so you know we have applied and we've got that in australia which is you know kind of a very strong form of guarantee around the um the trust and credibility of our organization uh and then the second part which is probably the most powerful bit is that we have a double a minus credit rating um which is the same as the big banks in australia very very very very hard to get um and you don't really get much more secure than that um in terms of interacting with us um so those things um allow us to be able to give confidence to customers that you know in dealing with us even that might not be a product that you're used to that you'll you know you're completely safe um in terms of the how it works and the nuts and bolts so because it's a guarantee product it's effectively an insurance product so we'll look at you as an individual your financial situation and we will take what we consider to be a calculated risk on your ability to pay the cash at the point at which it settles uh and we trade that off with how much the fee is going to be basically yeah right so if it's longer dated you'll we'll charge you a little bit more to cover some of that risk um but it's still you know only in this case for four years it's still only fourteen thousand dollars and you're set for four years yeah right and we no matter what happens over those four years if for some reason you can't settle at the at the point at which it's due to settle and you're set for four years to settle we will pay the full deposit amount to the seller yeah so we will give them the actual cash we'll pay to them and then we'll work out a plan with you to be able to recoup that money from you um so it gives you gives the vendor real security over time and it gives you the flexibility over that four years to be able to do what you whatever you can with your cash to make it work harder for you the finance investor brain in me is ticking over here right because um i know the only way that you guys could make this business model work for you by keeping that fee low enough to make it really palatable people yeah so you guys have access to capital as a big institution that's better than basically anyone else can get because of those credit ratings because of the business model because of the the global kind of presence and backing that you have to make it work for people yeah um that's exactly right and that's what is probably the the competitive advantage right of deposit power to be able to do that and to be able to do that do this cost effectively for people yeah it's a really really unique thing yeah that's exactly right and because we don't have the capital constraints of the bank yeah um we are able to do it really cost effectively for our customers and you know we are backed by hdi which is a enormous yeah insurance global insurance business um you know which provides us the the backstop on our risk and the double a minus rating so it's um yeah allows us to operate in a way that we're going to give customers a great option i actually in anticipation for all these discussions that we would be having i went and did all the research like anyone that's kind of um paying attention to these types of things would and um it was really really interesting to have to do that research and find out how the business came to be how long it's been in existence how many customers you have served um and it's been really interesting to open the box on this kind of part of the financial ecosystem i didn't know existed yeah and then how you could use that in practice yeah i'm thinking as i said maybe free advice i'm thinking in the back of my head if i'm doing an upgrade right i'm thinking do i sell first do i buy first you know that's a that's a big deposit i'm gonna have to come up with the next place right yeah so i'm thinking about all these things in the back of my head i'm just one person let alone all the property investors and so on and so forth that we have i do have a couple of questions here for you um that are kind of related to this one is um so this is this is really great that we can come on here and talk deposit bonds is there in your mind a time when cash deposits make more sense um look i think there's there's always going to be a role for cash in the transaction i think to some degree i think um you know if you feel like for example a cash deposit is an incentive for you to get a better deal or a quicker deal that can sometimes be a good role for cash but if you're looking at the transaction the security um the use of cash in your own portfolio versus putting it somewhere where it's not um working hard for you i honestly don't see any downside to using a deposit bond versus cash um it really should be in our mind the replacement for cash in all transactions whether it's for three-month settlement or over the long term just because of the security the ease of doing it and you're you know in my mind if you've got cash you should always try and hang on to it for as long as you can because yeah that's how you you know are able to make it work for work harder for you um so look i think there will be a role for cash depending on what your objectives are um but for a pure transaction perspective i think a deposit bond makes a lot more sense when you're thinking about your deposit strategy so right there seems like there are numerous uh instances or context in which people should be considering this yeah can you just recap some of those for us because we've covered a lot of ground yeah absolutely and i think it's a really interesting view is that you know you should always be thinking about your deposit strategy no matter what your situation is in terms of what you're buying i think it's kind of three key areas i'll give as an example so the first one is buying off the plan um so uh if you are looking to put down a deposit for a property that you're not going to settle on for between two and four years um what people typically do is have the cash deposit tied up in a trust account for that period of time which if you think about the average you know if you're looking to put down a deposit for a sale price for property in new south wales for example that could be between 100 and 200 000 of your own cash that's sitting doing nothing for a number of years so with a deposit bond you get to keep hold of that cash we'll guarantee that amount for the full period of time until you settle and you can use that cash in your financial portfolio in the best way possible so whether you have that offset against your current mortgage whether you're earning interest in a savings account whether it's in your super or whether you ultimately need to free it up from an investment property you don't have to think about doing any of those things for four years because we'll cover it and the money can work a lot harder for you during that period of time it's also really good for the seller because we guarantee that no matter what happens when it comes to settlement they will receive their deposit so that's a really strong reason to use a deposit situation to use a deposit bond the other one is in private treaty so you know just a normal homeowner buying a property that's not off the plan and within that actually one of the areas that we found particularly important is when customers are buying and selling at the same time and it happens way more often than you think you know often it's very hard to make the decision as to whether you sell first and then buy or whether you buy first and then try and sell your property in order to to do it and what we what we can do is you don't actually need to worry about that so if you're living in your home and you've identified a property that you want to buy immediately we will look at your situation if you've got equity in your home or if you've got enough savings or whether you've got a mortgage approved we will guarantee that you will settle on the property that you exchange on and then between that point and settlement you can work out the rest of your financial situation whether you need to sell your home or sell an investment property free up the cash so it really unlocks a big sticking point for people when they're looking to buy and sell at the same time and stops you having to do refinancing and bridging loans and those sorts of things and then i think the third one is for auction which is quite an interesting one of course yeah um which uh you know we've mentioned previously that you can apply and get approved for a bond within minutes online so if you identify a property that you want to go and bid on tomorrow you can apply today you can get the deposit bond on your phone and turn up to the auction and bid. I think if you don't have a deposit bond, you have to think about getting a bank guarantee, which can take a few days and costs upwards of $1,000. And also think about other ways you might need to free up that cash in order to go and actually bid. So it gives you a really nice kind of competitive advantage, actually, when you're thinking about outbidding other people and also gives you immediacy in market, especially when the market's moving quite quickly. We were talking off air earlier about Fridays being really busy for you guys. Yeah, really busy, yeah. Yeah, auctions are on Saturdays. People found the house, oh, wow, that's come up. That's really interesting. Let's go for it. But what do you do? Yeah, exactly right. Even if you're going to sell investments or term deposits, you can't always get your money that quick on a Friday. So yeah, not to say that people should rush into a property decision, but it's so quick. If you're ready to go, yeah, absolutely. Yeah, now we did, for folks that are listening, we did showcase the calculators that are on the Deposit Power website. If you're watching, the links are in the description for the podcast episode. You can go and check it out now. So you can run your own scenarios in there. You can see how much it would cost versus save if you've got a savings account, an offset account, whatever the case may be. It's all fully visible on the website. So you can head to depositpower.com.au or just follow that link and go and figure it out for yourself because I find it's fascinating, even for someone like myself, Ryan, to be honest, someone that's actively considering upgrading in the next couple of years. Yeah. And an investor, you know, like I don't want to have to pay extra tax to make way for this, right? So that makes a lot of sense. Well, mate, this has been heaps of fun. We've covered a lot of ground that we've never covered on the show before. I've never covered in the history of doing podcasts, which has been quite a while. So I really appreciate you taking some time and having this chat. My pleasure. Thanks for tuning into the Australian Property Podcast. If you love the show, why not subscribe or leave us a review on Apple or Spotify? And if you want to work with me, Amy, Pete or Chris, you'll find links in your podcast player to get in contact with us. Thank you for listening to this episode of the Australian Property Podcast. We're huge advocates of getting the right advice at the right time from the right people. That's why it's important to understand that this podcast episode contained general financial information only. It is not designed to be specific or personalised to your financial, tax or legal situation. With property, the check sizes are pretty big. So it's important you get advice from a licensed and trusted professional before acting on the information you hear in RAS podcasts. Thanks again for listening. 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