How does bank guarantee work?

[wll6568]

I am being told by a sales person that I could secure the deposit of a new sale using bank guarantee. What is it and how does it work? My understanding is the bank can assess either the cash balance in my bank or my existing home equity to give bank guarantee.

So if it's cash, would my cash still stay in my account? Would it get freeze and not touchable or earn interest? Is there any interest charged by bank?

If it's using home equity, would there be interest charged for that amount?

 

[jonmardell]

I am being told by a sales person that I could secure the deposit of a new sale using bank guarantee. What is it and how does it work? My understanding is the bank can assess either the cash balance in my bank or my existing home equity to give bank guarantee.

So if it's cash, would my cash still stay in my account? Would it get freeze and not touchable or earn interest? Is there any interest charged by bank?

If it's using home equity, would there be interest charged for that amount?

They are usually called deposit bonds and several places do it. deposit power is one of the more known ones. basically it is a type of insurance that you pay that guarantees the vendor that the deposit is there. it is used instead of a cash deposit.

 

[Blacky]

I am being told by a sales person that I could secure the deposit of a new sale using bank guarantee. What is it and how does it work? My understanding is the bank can assess either the cash balance in my bank or my existing home equity to give bank guarantee.

So if it's cash, would my cash still stay in my account? Would it get freeze and not touchable or earn interest? Is there any interest charged by bank?

If it's using home equity, would there be interest charged for that amount?

WLL

The bank guarantee is basically as it is titled. The bank guarantees that if requested, they will pay the amount of the guarantee.

In order to do this the bank will provide you a facility, either secured by property or cash, to the amount of the guarantee. You will pay a fee for it (usually about 2%). The funds will be 'locked' so you cant access them, however, you wont pay interest on the amounts. If it is cash, you might earn some interest.

Ask your bank about it.
If the deposit funds are required for a long period (ie for an OTP purchase) they are better than cash deposits. Not that the only way to cancel the BG is to have the physical guarantee returned to the bank - or following after the "facility expiry date". You do not have the option of calling the bank and cancelling the facility.
You also have no say in when the guarantee is called (i.e. paid). If the holder meets the conditions the bank will pay it - weather you agree or not. Usually all that is required is a letter requesting it to be paid.

Blacky

 

[tobe]

They are usually called deposit bonds and several places do it. deposit power is one of the more known ones. basically it is a type of insurance that you pay that guarantees the vendor that the deposit is there. it is used instead of a cash deposit.

Note, a bank guarantee is diferent to a deposit bond.

One is an insurance product issued by an insurance company, the other is issued by a bank and backed by cash of security property held by 1st mortgage of that bank.

Many OTP agents wont accept the insurance kind of deposit bond.

 

[delfredo]

Note, a bank guarantee is diferent to a deposit bond.

One is an insurance product issued by an insurance company, the other is issued by a bank and backed by cash of security property held by 1st mortgage of that bank.

Many OTP agents wont accept the insurance kind of deposit bond.

Would all banks offer 'bank guarantee' for the purpose of OTP deposits? The nab website, for example, refers to 'deposit power guarantee' which appears to be a insurance product (underwritten by CBL Insurance). I can't find any reference to bank guarantee on nab website.

CBA on the other hand, has detailed information on their bank guarantee product. It appears that they do not require any security as long as you can demonstrate sufficient equity in existing property. I think this is a big plus as you can continue to leave your savings in your loan offset account, continuing to minimise interest on your existing property home loan. Nevertheless it does mention that CBA is merely acting as agent for Vero Insurance so this again still appears to be an insurance product?

http://www.commbank.com.au/personal/home-loans/fact-sheets/Deposit_Guarantee.pdf

 

[Aaron_C]

A bank guarantee is secured by cash in your account with the bank. If the person with the guarantee requests the amount is paid, then it is paid by the bank (using your money). A deposit bond is an insurance product since no actual cash backing from the person exists. What's the point of the bank guarantee then? It allows you to basically give 'cash' for an OTP purchase without actually physically giving the money to the developer (For legal/safety reasons).

 

[ZachAnSel]

This process usually happens when banks can't release the money (redraw/LOC) before due to paper work process.

Bank guarantee usually last for 6 months and can be used for any property/auction.

If you use this method, make sure you also advise your solicitor because you dont have access to the fund before settlement.

 

[delfredo]

Bank guarantee usually last for 6 months and can be used for any property/auction.

Would it mean that it's not available for OTP purchase where completion date can be 2 or 3 years down the track?

 

[jonmardell]

Would it mean that it's not available for OTP purchase where completion date can be 2 or 3 years down the track?

deposit bonds can last up to 4 years but it costs!

 

[delfredo]

deposit bonds can last up to 4 years but it costs!

Well I guess bank guarantee is out of the question for OTP purchase with completion date of over 6 months. The two remaining options are then to either make a cash deposit or obtain a deposit bond.

I went to www.depositpower.com.au to obtain a quote and it costs $7K for a $70K guarantee over 36 months. Roughly, this translates to a cost of 3.3% per annum. Currently home loan rates are above this level so it does make sense to take up a deposit bond as compared to withdrawing $70K from the home loan offset account and therefore paying higher interest rate on the amount drawn for the cash deposit. Is this not so?

 

[jonmardell]

Well I guess bank guarantee is out of the question for OTP purchase with completion date of over 6 months. The two remaining options are then to either make a cash deposit or obtain a deposit bond.

I went to www.depositpower.com.au to obtain a quote and it costs $7K for a $70K guarantee over 36 months. Roughly, this translates to a cost of 3.3% per annum. Currently home loan rates are above this level so it does make sense to take up a deposit bond as compared to withdrawing $70K from the home loan offset account and therefore paying higher interest rate on the amount drawn for the cash deposit. Is this not so?

yes based on those figures a deposit bond would be better

 

[delfredo]

yes based on those figures a deposit bond would be better

Interestingly as I was reading the CBA and Deposit Power information on their respective websites, they say that "you can only apply for a Deposit Guarantee after you have unconditional loan approval (only subject to valuation)". As I understand it, nobody obtains unconditional loan approval now for OTP purchase where settlement is more than 18 months down the track... So I'm not sure how the application process works.

 

[jonmardell]

Interestingly as I was reading the CBA and Deposit Power information on their respective websites, they say that "you can only apply for a Deposit Guarantee after you have unconditional loan approval (only subject to valuation)". As I understand it, nobody obtains unconditional loan approval now for OTP purchase where settlement is more than 18 months down the track... So I'm not sure how the application process works.

you can get an approval from CBA that last 18 months and St George for 17 months for off the plan purchases. For deposit bonds you just need the approval subject to valuation which most lenders can provide.

 

[CapnBloodbeard]

I'm in a position where I may have to use this company (deposit is currently locked up in a FHSA).

So it seems that this is something that has to be negotiated with the Vendor – and if they want cash now (and not in 2 months time) then it leaves me at a major disadvantage.

So, considering this is probably an unfavourable condition upon a contract, when is the best time to bring this up?

When making an offer, or after acceptance of the offer and when negotiating contract?

 

[tobe]

Have you asked the FHSA bank whether they can secure a bank guarantee against the funds held in the FHSA?

Im sure this would send them into a tail spin, but its possible. Usually bank guarantees are secured by a term deposit, and a FHSA is just a type of term deposit...

otherwise, Id do the right thing and be upfront with the agent now, while negotiating, rather than wait till the offer is accepted.

 

[delfredo]

you can get an approval from CBA that last 18 months and St George for 17 months for off the plan purchases. For deposit bonds you just need the approval subject to valuation which most lenders can provide.

I wonder why banks like CBA and SGB wouldn't provide guarantee for a longer period of time if the applicant can back it up with a similarly termed fixed-deposit (ie. 3 year term deposit for a 3 year bank guarantee)?

 

[jonmardell]

I wonder why banks like CBA and SGB wouldn't provide guarantee for a longer period of time if the applicant can back it up with a similarly termed fixed-deposit (ie. 3 year term deposit for a 3 year bank guarantee)?

it would be their interpretation of the law, an approval without assessment any longer than 18 months is too long as a lot a things can change.

 

[CapnBloodbeard]

Have you asked the FHSA bank whether they can secure a bank guarantee against the funds held in the FHSA?

Im sure this would send them into a tail spin, but its possible. Usually bank guarantees are secured by a term deposit, and a FHSA is just a type of term deposit...

otherwise, Id do the right thing and be upfront with the agent now, while negotiating, rather than wait till the offer is accepted.

There wouldn't really be any difference between that a Deposit Power Guarantee anyway, would there?

So you're thinking I should mention that deposit concern at the time of the offer, and not look to negotiate terms afterwards.....I guess that makes sense

 

[tobe]

There wouldn't really be any difference between that a Deposit Power Guarantee anyway, would there?

So you're thinking I should mention that deposit concern at the time of the offer, and not look to negotiate terms afterwards.....I guess that makes sense

You'll find most developers can see the diference, many dont deal with deposit guarantees, as their funders dont recognise them.

Yup, thats my opinion. But I guess, I shouldnt have an opinion, cause I wouldnt be buying off the plan. too risky, and not enough potential upside to compensate.

 

[delfredo]

You'll find most developers can see the diference, many dont deal with deposit guarantees, as their funders dont recognise them.

Yup, thats my opinion. But I guess, I shouldnt have an opinion, cause I wouldnt be buying off the plan. too risky, and not enough potential upside to compensate.

Sometimes OTP can be 1 month away to completion.