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In Australia when a person or entity enters into a contract to purchase residential property, it is common practice for the purchaser to lodge a cash deposit of up to 10% of the purchase price with the vendor's solicitor as security for the purchaser's obligations. The deposit gives the vendor (the seller) a fund against which they can claim if you fail to complete the transaction.
A Deposit Bond is an instrument that, by agreement with the vendor, can replace the need for a cash deposit. It is a convenient way of purchasing a property without the need to arrange a large cash deposit or immediately cashing in or selling an investment that may mature at some point in the future. The Deposit Bond is issued by an insurer to the vendor for all or part of the deposit required.
If the purchaser fails to complete the purchase of the property and has used a Deposit Bond, the vendor or the holder of the Deposit Bond has the right to present the Deposit Bond to the Insurer and claim the full amount of the Deposit Bond. The Insurer will then seek reimbursement from the purchaser for any monies paid by it plus any other costs and expenses.
In essence, a Deposit Bond enables the purchaser to defer until settlement of their 10% deposit.
A Deposit Bond is NOT a policy of insurance. It is a form of surety or guarantee.
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