Deposit guarantees - A helping hand for buyers

The recent interest rate cut, which brought the prime rate down to its lowest level in more than 30 years, coupled with the correction in property prices that we’ve seen over the last few years, have had a positive impact on affordability. However, the steep deposit requirements most banks continue to enforce remain a challenge for many property buyers in South Africa.

“In some cases, deposits of up to 30% of the purchase price are required, while 100% bonds, especially for properties valued at R1 million or more, are rare,” says Adrian Goslett, CEO of RE/MAX of Southern Africa. “This means that despite the gradual improvements in affordability, many prospective home owners are unable to take advantage of the buyers’ market we are currently experiencing, simply because they cannot immediately access the cash required to pay a deposit to confirm the property purchase,” he says.

In many cases, prospective buyers do in fact have the financial ability to access the required deposit, but cannot do so immediately for a variety of reasons. “For example, a buyer may well have enough equity in their existing property to cover the deposit requirement, but will only be able to access this cash once the sale of the property is finalised. In this case, the buyer could consider accessing their bond to obtain the cash, or making use of bridging finance to raise the money. However, due to the administrative costs and particularly the interest rates payable on these short-term finance options, neither option is an attractive proposition,” explains Goslett. It may also be that the cash is tied up in investments and that liquidating those investments could result in financial losses. Examples would include selling an investment such as shares in a depressed market; cashing in a fixed deposit at a significant cost before maturation; or liquidating an investment that is earning exceptional returns.

Essentially allowing a purchaser to “buy time” between the immediate requirement to pay a deposit to the seller, and paying the deposit on transfer of the property, a deposit guarantee could well be the answer to ensure a great property deal is not lost due to the deposit requirement.

An alternative to a cash deposit, a deposit guarantee is a legal insurance product that guarantees the payment of the cash deposit upon transfer of the property. This means that the buyer pays the full purchase price, including the deposit which is guaranteed, once the transfer takes place.

“It is important for buyers to understand that a deposit guarantee does not pay the deposit for you, but rather buys time – between three and 24 months - so that they can pay the deposit when the property transfer takes place instead of when the agreement of sale is signed,” comments Goslett.

Thus, for a deposit guarantee to be issued, the buyer must be able to prove that he or she will have access to the deposit amount on the date of transfer, but does not have to access these funds at high interest rates until that date. Due to this simple requirement, deposit guarantees are often issued in as little as 24 hours.

“Of course, it is entirely up to the seller to agree that a deposit guarantee will be acceptable in lieu of an immediate cash deposit,” says Goslett. He adds that the guarantee is an assurance to the seller that the deposit will be paid on transfer, whether by the buyer or the company that issued the guarantee. “However, most sellers in the current market do appreciate the fact that a delayed, but guaranteed, deposit is preferable to losing an offer from a serious buyer. Deposit guarantees can also be used at property auctions, again provided that the seller agrees,” he says.

Deposit guarantees have been used in Australia since 1989, and are now widely available in other countries including New Zealand, the UK and the USA. Introduced into the local market last year, deposit guarantees are relatively new in South Africa and not all buyers are aware of this alternative to the immediate cash deposit requirement.

“It is crucial to deal with an estate agent who understands the implications of using a deposit guarantee and can explain these to both the buyer and seller,” says Goslett, adding that it is often best to insert a condition into the agreement of sale that will address the standard deposit conditions. “A competent estate agent will ensure the rights of both the seller and the buyer are protected and that the deposit guarantee is used to achieve the best possible outcome for both parties,” he concludes.

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