From scheme details to released deposits
A deposit release bond lets you use your buyers' deposits during the build, while a specialist insurer protects each buyer. Here is what the bond is, then the six steps to getting one in place.
What the bond is
A deposit release bond is issued by a specialist insurer for the benefit of the people buying homes on your scheme. It stands behind their deposits, so the money can be released to you instead of sitting untouched until completion.
Paid on exchange
Buyers pay a deposit when they exchange on an off-plan home, often around 10% of the price. Normally a solicitor holds it until the home completes.
Released to you
With the bond in place, the sale contracts allow the deposits to be released to you and spent on the build. The premium is typically around 4-6% a year, against 12-20% for mezzanine finance.
Buyers stay covered
Each buyer receives a certificate. If the developer cannot complete the home, the buyer can claim their deposit under the bond. The bond wording sets out exactly what is covered and when.
More detail in what is a deposit release bond? Arranging a new-home warranty now? Section 1 deposit protection does a similar job from inside the warranty.
The six steps
Send us the scheme details
Location, number of units, GDV, sales position, build programme, senior lender and warranty provider. The indicative terms form takes a few minutes.
Initial assessment
We look at the scheme and your financial position and tell you frankly whether it is worth taking to market, and what the underwriter is likely to focus on.
Underwriter review
We present the case to specialist insurers and deal with their questions. Expect requests for recent accounts, the appraisal and build programme, and the security on offer. Some underwriters ask to visit the site.
Terms issued
The terms set out the premium, the term of the bond, the security required and any conditions on release. You decide whether to go ahead.
Bond put in place
The security documents are signed, the premium is paid and the bond is issued. Each purchaser whose deposit is released receives a certificate.
Deposits released
Once the bond is in place, deposits can be in your bank account within a week. They are released in line with the agreed terms and the sale contracts, and the money is spent on the development.
What the underwriter will want
- The last two years' accounts for the developing company, or management accounts and the group position for a new SPV
- The appraisal, build programme and costs
- A schedule of sales, reservations and deposits
- Your senior facility letter
- New-home warranty or structural cover details
- Your track record of completed schemes
- What security is available - usually a personal guarantee or a counter-indemnity
Your senior lender
Whether the senior lender's consent is needed depends on your facility agreement. We read the facility terms early so nothing comes as a surprise, and we will tell you if the lender needs to agree anything, including the insurer's security.
If the build over-runs
Bonds are set to the build programme. An extension can be requested for an additional premium, subject to the insurer agreeing. Tell us as soon as a delay looks likely and we will deal with the insurer before the term runs out.
Through to release
A bond that stays live after the scheme completes can keep costing money and tie up your security. We track every bond we arrange through to its formal release.