How does bank guarantee work?

[delfredo]

Just sharing back to the forum what I've been told by a CBA staff at the branch in relation to a bank guarantee secured against term deposit investment (not deposit bond):

• One-time $250 application fee
• Ongoing fee of 1.5% per 6 monthly period, not pro-rata if less than 6 months
• Term deposit period does not have to match bank guarantee validity period (I doubt if this is true)
• On the spot processing of application at the branch

On this basis, it doesn't look very attractive. It costs 3% per annum to obtain a bank guarantee, against a possible 4% term deposit interest rate that is currently available. In comparison, if one is to make a deposit payment to the vendor's solicitor, interest earned on that money is shared 50-50 between the purchaser and the vendor. I would assume that the purchaser's 50% share of the interest would be higher than the 1% effective interest that can be earned by drawing on a bank guarantee against the term deposit investment.

So the question is, why bother with bank guarantee? What is the real advantage, particularly for situations where completion date of an off-the-plan property can be 2 or 3 years away?

 

[Aaron_C]

So the question is, why bother with bank guarantee? What is the real advantage, particularly for situations where completion date of an off-the-plan property can be 2 or 3 years away?

Don't go with CBA

 

[tobe]

As aaron said, each bank has a diferent cost for bank guarantee, so it might be cheaper elsewhere.

Im not sure about the estate agents trust account spliting the interest on the deposit???

That sounds a bit odd, if its true, you would need to find out what rate they get on a trust account. i doubt it would be better than your term deposit rate minus the guarantee fee....

Half of not much is usually better than the whole of not much......

 

[delfredo]

As aaron said, each bank has a diferent cost for bank guarantee, so it might be cheaper elsewhere.

Im not sure about the estate agents trust account spliting the interest on the deposit???

That sounds a bit odd, if its true, you would need to find out what rate they get on a trust account. i doubt it would be better than your term deposit rate minus the guarantee fee....

Half of not much is usually better than the whole of not much......

I'm not sure about VIC but the standard NSW sale of land contract (if not amended by special clauses) states that interest on deposit held in trust account is shared equally between the purchaser and the vendor.

True about asking around the banks. NAB said they will require the applicant to firstly obtain a conditional loan approval, prior to processing the bank guarantee request eventhough it will be backed dollar for dollar by an investment in term deposit and eventhough the off the plan property may not complete until years later.