What is Vendor finance?
Vendor finance is an agreement where the owner of a property (often called a ‘wrapper’) offers finance to the purchaser. The purchaser never legally owns the property until all the money owing to the vendor has been paid.
The purchaser usually pays an interest rate about 2 to 2.5 per cent higher than the standard home loan, and may also pay a premium over the purchase price of the property to the vendor. Because the purchaser is not the owner, they have limited rights.
If the vendor in their turn has borrowed to financed the property and they default on that loan, the purchaser still loses possession and any possibility of ownership even though the purchaser is not in default to the vendor. The purchaser’s only recourse may be legal action against the vendor who may have no assets.
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What is a Deposit Bond?
A deposit bond is a guarantee, usually issued by an insurance company, which can be used by a purchaser instead of paying a deposit on the exchange of contracts for the sale of land. The purchaser must then pay 100 per cent of the purchase price on completion of the sale.
Under the deposit bond, the issuer of the bond promises to pay the amount of the deposit to the seller of a property if the purchaser does not complete the sale of the property. If the issuer is required to pay the deposit, it will seek to recover that amount from the purchaser.
In assessing an application for a deposit guarantee, one of the key issues for the issuer of the bond is whether the purchaser has the necessary funds to complete the purchase. If the issuer is not satisfied of this, they will not issue the deposit guarantee.