Bridging loan versus deposit bond

Published by MFAA

When selling one property and purchasing another, the funds from the sale may not be available in time to use for the purchase deposit. There are typically two options in this scenario: a bridging loan or a deposit bond.

Bridging loan

A bridging loan is a short-term home loan designed to allow you to initiate the purchase of a property before you have sold your previous one.

Loan terms are often between six and 12 months and bridging loans generally have a higher interest rate than traditional home loans.

A bridging loan can be a great option but carries some risk. It’s important to be confident you'll be able to make the repayments even in a worst case scenario, for example if your old house doesn’t sell as quickly as you’d hoped or property values change unexpectedly.

It’s important to talk to a broker and ensure that you have the capacity to service the loan for the period of time required.

Deposit bond

A deposit bond is a tool that, upon agreement with a vendor, can replace the requirement of a cash deposit when purchasing a property.

A deposit bond can be a relatively cheap method of initiating the purchase of a property,  usually without the need to liquidate your other assets. The cost of a bond can vary depending on transaction complexity and the term being sought.

A deposit bond is issued by an insurer to the vendor of the property for either the full or partial deposit required. At settlement, the purchaser must pay the full purchase price including the amount of deposit. At this point, the deposit bond becomes void.

If the purchaser fails to complete the purchase of the property, the vendor is able to give the deposit bond to the insurer who will provide them the entire value of the deposit bond.

The insurer will then seek reimbursement of the deposit bond from the purchaser.

Deposit bonds are generally cheaper than a short-term loan, but it’s important to talk to a mortgage broker to compare the two, taking into account your requirements and objectives and your financial situation.

Find an MFAA accredited finance broker to discuss which option is right for you.