Sustained interest rate rises have mixed effects on the prospects of service providers in the home loan supply chain, but usually count as a massive boon for players in one of the most overlooked product segments – deposit bonds.
A deposit bond is simply a certificate underwritten by an insurer that is used as a substitute for a cash deposit on property transactions.
When a deposit bond is accepted by a property vendor, the purchaser doesn’t have to stump up the traditional ten per cent cash deposit following an auction.
Instead, the purchaser holding a deposit bond authority is able to pay 100 per cent of the agreed property price on the settlement date.
Demand for deposit bonds tends to increase when rates are rising because there can be an opportunity cost for property buyers of handing over a large wad of cash if the settlement is likely to extend beyond several months.
In some cases the cost of taking out a deposit bond could be easily covered by retaining cash in an income-generating asset for the period between an auction and settlement.
The average fee paid to get a deposit bond is about 1.3 per cent of the deposit required.
On a A$1 million property requiring settlement in 6 months and a deposit of $100,000 the fee works out to $1300.
Deposit bonds are particularly useful for so-called “downsizer” home buyers who might not have sufficient cash for an upfront deposit on a new residence before they offload their existing property.
In Australia, the deposit bond market is becoming a hotly contested space, with a string of providers vying to consolidate and grow their footholds in the niche market.
The market is dominated by three companies two of which – Deposit Assure and Deposit Bonds Australia - have products underwritten by QBE.
The other the leading player is Deposit Power, which has sold more than 1 million bonds since it entered the local market in 1989.
Deposit Power is the only vertically integrated provider, being underwritten by one of its major shareholders, the Johannesburg-based Lombard Insurance Company.
In the last six months Lombard has renewed its capital commitment to the Deposit Power business by investing in new digital platforms and expanding its sales and distribution footprint around the country.
The company last year poached Brent Davidson – a former senior executive at Athena Home Loans – to lead the distribution overhaul.
Davidson, who managed the sales function for Athena, was one of the key drivers behind the non-bank lender’s launch in 2018 and building out its distribution from scratch.
Since arriving at Deposit Power in November, Davidson has been kept busy with the rollout of the company’s new technology platform, which he says now delivers an automated approval system capable of returning decisions to customers within minutes.
“We’ve got a massive year ahead – the technology investment is significant,” he said.
“We are developing a new website to support a brand refresh and we are also investing in expanding our sales teams.”
Deposit bond providers traditionally have relied on mortgage brokers to market their products.
Both Deposit Power and Deposit Assure are on the panels of the country’s largest mortgage aggregation platforms, including AFG and Choice.
However, Deposit Power is looking to widen its distribution to include automated proprietary channels and a broader base of third party partners.
An emerging key battleground in the deposit bond market is the scramble to forge partnerships with lenders.
Deposit Power already has referral arrangements in place with IMB and Bendigo and Adelaide Bank.
In many ways, deposit bonds compete against the major banks, which still issue high-cost bank guarantees for asset-rich property buyers with short-term liquidity challenges.
The question for the major banks is whether they will look to replace their proprietary guarantees by entering partnerships with more efficient monoliners such as Deposit Power.
The banks might have an incentive to go down such a path because deposit bonds are likely to be a cheaper way of supporting their mortgage businesses as volume growth is challenged by higher rates.