PURCHASING OFF THE PLAN - The best way to pay your 10% deposit.

• DEPOSIT BONDS
• BANK GUARANTEES
• BORROWED FUNDS

DEPOSIT BONDS - Long term Guarantees (settlement over 6 months)

This is where the underwriter will take in to account the applicants existing financial position taking particular notice of their property equity situation. As a general rule with most underwriters the purchaser will need to have 5 times the amount of the bond value in property equity.

E.g. a customer is looking to purchase a property off the plan for $450,000. The deposit amount is $45,000. Therefore they will need $45k x 5 = $225,000 in property equity. (It must be property equity and not funds in a Term Deposit or Managed Fund etc.) This will need to be confirmed by the insurer through sighting existing bank statements and performing valuations on their properties all of which is included in the fee total. **This type of deposit bond doesn't need the customer to provide any proof of income, nor do they need to prove they can service the future debt at the present time**

If the client does not have 5 times the deposit bond cover in property equity, we can look at another option which will involve them providing proof of income, existing debts (much the same as a normal loan application) which will only require them to have 3 times cover. Whereas the above option needs to be property equity solely, this option allows them to have 3 times cover ($135k) in a mixture of property and/or shares, Managed Funds with a minimum of $50k required in property equity.

E.g. the same scenario as above where the client has only got $50k in property equity and may have $85k in a managed fund (Equity) we can do a full application to the underwriter based on their expected position in 18 months. They are quite flexible here as we can base an application on the sale of an existing property or the fact that they may have a personal loan paid out at settlement time.

The fee is based on a sliding scale depending on bond value and date of sunset clause.

Please contact us for a quote

ADVANTAGES:

• Cost effective

• Doesn't tie up equity in property and is not reliant on cash security

• Opens up more options to people depending on their financial position. E.g. if no cash available or if their property is secured by a lending body that doesn't issue bank guarantees.

DISADVANTAGES:

• Whilst they are issued generally within 48 hours from approval, they can take longer to get established especially if we require supporting documentation from a client to get it approved and for valuations to be conducted.

• Maximum term is 36 months. They can still be issued for longer settlements but the developer would need to understand that it will expire after 36 months and further arrangements will need to be made.

• Excludes managed units and serviced apartments.

WHAT ARE THE OBLIGATIONS?

If the property fails to settle thereby breaching the obligations under the Contract for Sale, the Vendor may become entitled to the forfeiture of your deposit. The underwriter will then receive a claim from and subsequently pay to the Vendor the deposit monies in accordance with the commitment as guarantor. Pursuant to the terms of the indemnity agreement contained in the application form the purchaser is liable for this debt and therefore must reimburse the underwriter. Failure to do so will result in the Underwriter instigating recovery proceedings with full recourse against them.

BANK GUARANTEES:

A Bank Guarantee is very similar to a deposit bond. There are a couple of different ways to have a Bank Guarantee secured:

• CASH - A term deposit is taken out with a lender where the client can earn the attributed rate of interest on their term deposit and then issue a bank guarantee dollar for dollar secured against the Term Deposit.

E.g. a customer has the $45,000 required for the deposit sitting in their bank account with ABC Bank. They can put this into a Term Deposit and earn 6% and then have the guarantee issued for the same amount. They must have a minimum amount of the guarantee value in the Term Deposit.

• PROPERTY SECURITY - If the customer has available property equity with their existing lender they can arrange a bank guarantee against their available security. This is a better alternative than taking out a Line of credit against the same security because of the reduced cost.

E.g. a customer has a loan with ABC bank for $150,000 and their home is valued at $450,000 and thus has $300,000 equity in their property. The bank will then issue a bank guarantee, which is secured dollar for dollar by the property. This will thus tie up an additional $45,000 of their existing equity.

A typical Bank Guarantee issued by a major lender will have an application fee and an ongoing quarterly fee. E.g.

• Application Fee - $500

• Ongoing Fee - 1.25% of the Bond value per half year

ADVANTAGES:

• Cost effective

• Can leave funds in TD as opposed to terminating before rollover and incurring penalties.

DISADVANTAGES:

• Tying up equity in your property or cash depending on the security.

• Can be timely to issue depending on the bank, manager etc. This is also dependent on whether valuations are required. It could take up to 2 weeks in this case.

BORROWED FUNDS: - including funds accessed through an existing Offset account

This option depends on whether the funds are already available on a Line of credit or in redraw or whether they need to make application for the funds.  Obviously if they need to make application, there will be establishment fees applicable, mortgage stamp duty along with the interest accrual.

E.g. a customer has an existing Line of Credit with the appropriate amount of funds available for the deposit. They simply write a cheque against the account or make a transfer and interest will start to accrue.

• Application Fee - Anywhere from NIL if already under a package to $600.

• Mortgage Stamp Duty - 4% of loan amount approved

• Interest - Depending on product but on average 7.5% p.a.

ADVANTAGES:

• Fast access to funds and less hassle

• In some cases vendors may pay you a nominal rate of interest on your cash deposit which will be paid to you on settlement and this can make the cash option more attractive.

DISADVANTAGES:

• Costly

• Using funds that could be used towards other investments in the mean time

CASE STUDY

A member is looking to purchase a 2-bedroom apartment in a new development for $535,000, which is due to settle on the 31st December 2008. They are in a good financial position and have property equity to the value of $350,000 as a conservative estimate in their existing properties.

They have $80,000 available in their existing Line of Credit, which they can access at any stage and as such have already paid the appropriate set up fees. They would like to know the best option to pay the deposit to the developer.

The 10% deposit amount is $53,500 (required property equity $267,500) and as such they are in a position to take advantage of any of the three options available to pay the deposit.

Comparison: (period 20 months)

Line of Credit:

$53,500 @ 7.5% p.a = $6,687.50

Deposit Bond:

$53,500 - Fee = $3,036

Bank Guarantee:

$500 - Set up

1.25% per half year = $668.75 (This is payable in advance and no refund is given should the guarantee not be required for that half year.)

Total cost for 20 months = $3,175

**These comparisons are based on the developer paying no interest on the cash deposits. If they were to pay a rate of interest it would alter the cost of the borrowed funds option, as this would offset the cost to them against their loan. We have not assumed a rate of interest payable as it is on a case-by-case basis depending on the vendor**

Speak with our Finance Manager on freecall 1800 804 296 about this in more detail, or make a time online now.