Bank Guarantee vs Deposit Bond - Huh??

[quintets]

Hi all,

My wife and I are very excited to announce we've found a very good OTP property down the street from one of our IPs. The lead came from our PM, God bless her soul.

Anyway, we were told that an option to a deposit bond, which we're pretty sure we could get, is a bank guarantee. What is a bank guarantee and how does it work? All I know is "it's cheaper" than a deposit bond. Since we have a bit of equity in our other properties, it sounds like it might work. I think it's based on equity we have already. But in an OTP situation, how does this fit in?

Cheers,

Jireh

 

[JoannaK]

A bank guarantee is basically just that....a guarantee issued by a bank. Basically it's a piece of paper with an official stamp on it, and it gives the holder (e.g. ABC Developments P/L) the right to cash in the guarantee when certain circumstances deem it appropriate/necessary.

the approaval process for a bank guarantee is pretty much the same as a loan approval process, and the bank will only issue a bank guarantee is they can actually guarantee that you're good for the funds.

Developers these days are preferring bank guarantees over deposit bonds as some lenders are shying away from deposit bonds, and some deposit issuers are trying to reneg on their obligation to pay out on a deposit bond.

Basically if you're approved for a bank guarantee you will exchange contracts with the bank guarantee as a deposit. On settlement you will be required to come up with the whole purchase price.

If you rescind your contract the developer will cash in your bank guarantee and then the bank will pursue you for the money.

 

[quintets]

I had a hunch that a deposit bond was an "unsecured" loan and a bank guarantee was "secured"...or could be secured. Is that why it's cheaper, because it's secured against something?

Jireh

 

[JoannaK]

Hi again Jireh,

neither of them are loans...they are guarantees that the money will be handed over by the issuer when it is required to be handed over (ie when or if you rescind a contract). The bond or guarantee issuer will give the developer the money, and then they will chase you for it.

Basically, whoever is giving you this bit of paper will look through your finances and decide whether you're a good risk or a bad risk. If you're a good risk they will give you a piece of paper that guarantees you. They are not lending you any money at this stage - that will come later when you prepare for settlement. They are saying to the developer "we will take a bet on this guy, and we think that if he rescinds his contract we can get our money back from him relatively easily".

hope this helps.

 

[chook]

Talking about deposit bonds ..... I worked in an office that dealt with the litigation that happened when the buyer did not go ahead with the purchase and the insurance company had to pursue the buyer for the deposit. When the buyer was sued and the court required the buyer to present a statement of assets and liabilities and details of income, I was surprised at how often the insurance company had taken a bet on people who obviously had no assets and only the income from a job. What usually happened was that the buyer applied to pay the debt by instalments and the court had to grant it, because you can't get blood out of a stone. This may be one reason why insurance companies are going a bit cool on deposit bonds at the moment - they've been bitten too many times.

 

[Tony Pham]

Loan

Hi all,
I am very new to the forum and want to say G'day to everyone.

I have a question regarding loan and cross-collaterise and wonder if anyone could share some information for me.

I am refinancing my current loan with Colonial on my existing property in Newtown, in order to draw out the equity and purchasing the next property.

I have to pay off the loan with Colonial. I was told that we should use different lender for each loan. Is it correct?

Is it ok to obtain the new 2 loans with the same lender? Am I cross-collaterised the 2 properties by doing so? Or is it ok to have 2 seperate loans with the same lender?

Is there any information on the above topic that I could get my hand on? or anyone kind enough to share some information with me.

Thanks.

 

[Rolf Schaefer]

Tony,
as was suggested in one of your other posts, contact a good mortgage broker. Rolf Latham is the obvious choice.

 

[quintets]

cross-collateralisation

Tony,

I've got two loans for two IPs with the same lender and because each house is only mentioned by itself on the mortgage, they are not cross-collateralised. How? We bought them six months apart and had managed to save a deposit for the second one, so instead of pulling out the equity from the first IP, we just put a new deposit down on the second one.

If we had used the equity from IP A as part of the loan for IP B, and the mortgage for IP B mentions IP B as well as IP A, then you're cross collateralised.

Welcome to the forum. Please feel free to read as much as you can and ask whatever you like.

Jireh

 

[geoffw]

If we had used the equity from IP A as part of the loan for IP B, and the mortgage for IP B mentions IP B as well as IP A, then you're cross collateralised.

At minimum, banks won't tell you that you can do this. At maximum, some institutions insist that properties must be x-colled.

 

[quintets]

Okay,

I asked my building society where my IP mortages are, Heritage, and they don't do bank guarantees. My PPOR bank, the National, will only do bank guarantees if the money is sitting in a bank account. The call centre person said if it involved property, I'd have to draw the equity out first and then put it into an account. It would probably be more expensive that way than the cost of the deposit bond.

How can I convince the bank I'm good for the money if they all want to see the money?

Jireh

 

[Rolf Latham]

Hi Jireh

Rubbish about the NAB.

Of course they will do a guarantee against equity.

I could be wrong but all of the major banks do these things daily.

ta

rolf

 

[Alan H]

Hi Jireh

...................


Rubbish about the NAB.

............
rolf

Hi Rolf.

Just as an aside, from a broker point of view, have you noticed and changes from NAB as a result of them trying to 'modify their culture' etc etc? In particular, I was wondering if you felt they were becoming 'more accommodating' to investors to stop some of that business loss.

 

[quintets]

Rolf,

So should I ask NAB again, but maybe talk directly to a lending manager instead of the call centre?

I've got my IP in a Building Society and my PPOR at NAB. I've got enough equity on either to ask for a guarantee. Is it worth asking both again? Do building societies give bank guarantees normally?

One last question, if the guarantee goes against equity and the developer doesn't "exercise" the guarantee until settlement, then would the only costs be the cost of setting up the guarantee? ie. no money drawn on equity so no interest costs right?

Thanks for all the help so far.

Jireh

 

[Rolf Latham]

Hiya Quinn

Ring up your NAB PB, they should be able to advise.

The builiding society wont generally issue a guarantee because their charter doesnt allow them I suspect.

Cost of Guarantee varies but can be as high as 1.6 % per 6 mths

ta

rolf

 

[quintets]

Hi Rolf,

Well, I spoke to the lending section (as opposed the the call centre) at both NAB and Heritage B.S. and wow, they both have some kind of guarantee. Unfortunately, it was after 4pm on Friday and they said someone would call on Monday.

It hasn't happened. No one has called me back or returned my later calls yet.

Now, my deposit bond is probably going to be approved on Monday. The only reason I looked at bank guarantee's is because someone told me it's cheaper than a deposit bond. My DP is probably going to be $1800 for 18 months. I read somewhere that banks charge 1.6% of the guarantee for six months. So for 18 months on a $38K guarantee, I think it's 4.8% (3 x 1.6%) of $38K, which is $1824. Same thing, if I have have one bird in the hand, it might be just fine.

So would you know if my estimate on the cost of the bank guarantee is correct? I'm assuming here that the vendor doesn't "use" the guarantee until settlement, so the only cost is the bank fee on the guarantee.

Just wondering,

Jireh

 

[juzz]

Jireh,

Just one thing to check is that the Developers financier will
accept the Deposit Bond??
Not all Construction Financiers will accept them.
It's a nightmare for the developer to change all of the OTP sales DP's
to BG's.
Also, usually the BG can be Drawn on settlement by the Developer(Vendor).
And it depends on how your BG works when it comes to costs.
Some Banks & brokers will charge extra fees other than the %fee.

Justin

 

[quintets]

Justin,

I know the developer's bank will accept a deposit bond. What I'm curious about is there a base level % feel the banks will charge for the BG? I heard 1.6% for six months is a rule of thumb. I'm surprised it was a percentage and not a flat rate. Would you know any real life examples? The banks aren't going to tell me as part of an information gathering session, so I'm not sure what to expect.

Jireh

 

[juzz]

Jireh,

Its more dependant on how they structure the security of the BG.
The theoretically easiest & obviosly more safer way for the Bank
is to set one of your properties up on a LOC. Drawdown the
money & put it into a Term deposit & Then Guarantee the Money
in the Term deposit account.(As its as near to Cash as you can get Now)

Your on the ballpark for the rates.1-2% setup. But be carefull as the main problem is the differential between the Term deposit Rate(Say 4%) & your New mortgage rate(6.5%) is the more relevant & main cost of the Guarantee.(Extra 2.5% of the total drawdown)

There are other ways of structuring You Guarantee & the another way
is just to get the bank who has your existing mortgages to Just sign
a Guarantee with your existing security saying your good for it.
(Simpler but most Banks don't play ball with this method for first timers)
ie As they may be looking to make more money from selling you products. etc etc.

Hope this Helps.

Justin