Hello,
Hoping you could help me out on this one. I’m thinking of buying an apartment off the plan in Melbourne that is at least a year from completion. Can pay the 10% deposit of around 50k either upfront or via deposit guarantee; not sure which way to go.
Roughly how large are the fees for a deposit guarantee likely to be for a 12-18 month period? Will these fees be more than any interest I can generate via a term deposit? Are there any additional factors I should be taking into consideration?
In early 2008 we bought an off-the-plan for approximately the same price and same period, the deposit required was 10% which equated to approx $53,000. We decided to use a deposit bond which cost us approx $7,400 instead. Our primary reason for doing this was because we decided we wanted access to the remaining cash for other possible investments. Obviously, this is simply deferring the remaining payment until completion. Here's a few other things that we learnt…
1. Do you want access to the money for any other purpose ? If so, maybe a bond would be better.
2. Do you have the $50,000 in other assets (I'm assuming that you do, but the bond company may ask for proof of this, as proof that you can meet the obligation when due. Obviously, just because you have the money now doesn't mean you'll have it in 12-18 months time)?
3. Check out the 'sunset clause' in the contract. This will say when the building must be completed, and may be longer than the 12-18 months you currently expect. The longer the clause, the higher the price of the bond. Our sunset was for approx 3 years, even though the building is due for completion in 2010.
4. If you decide to pay the full 10% now, the money will attract some interest on your behalf, but I suspect that this will be minimal given the current cash rates. Treat this extra interest as a bonus !
5. One other thing to consider in the current climate. Although highly unlikely, the developer may go broke before the property is completed. Check out the legal aspects of what would happen for both your options i.e. using your own cash or using a bond for the deposit. Hopefully, you'll never be in the position to find out, but it's better to do your research beforehand !Wow, $7,400 for a deposit bond sounds incredibly expensive. We've used them numerous times in NSW and they were only hundreds of $ not 000's! Shop around and get some prices first and then make your decision, that's my advice!
Mick not so easy to shop around these days as there are only 2 dominant players and for an off the plan property over 12 months that soudns about right.
Like anything insurers are worried about loosing money like everyone else.
Richard Taylor | Australia's leading private lender
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