Many property investors buying new
properties off-plan are disheartened
to find themselves handing over a
10% deposit to the developer.
Jane Howard finds alternatives

Putting down a deposit on an unbuilt property means that useful capital is tied up for months and perhaps years on end – and let’s face it, £20,000 on a £200,000 flat is not exactly loose change. Yet handing over a deposit is neither a guarantee that the developer will complete on time or even at all.

But is there an alternative? Well, yes, there is: the property bond. Examples include one that was launched with absolutely no fanfare last year by an insurance company, the Term Exchange Bond.

This not only slashes the cost of reserving a property, but the developer is likely to actually fund the cost of the bond for you.

The product works very simply but you must go through an independent financial adviser or solicitor. First, you apply for a bond and send off a non-refundable fee of £85 to the provider, the Exchange Insurance Company (‘ExCo’).

You will then be credit checked to ensure that you will have the funds to complete on the purchase. If all is well, you will receive a quote back for a bond, essentially an insurance that you will buy the property.

The cost of a bond differs on a sliding scale, depending on how long you need a bond for. But, according to ExCo chief executive Peter Lane, a typical cost for a six-month bond on a £200,000 off-plan apartment would be £850.

The bonds have not been advertised or promoted, other than by talking to developers, estate agents and financial advisers. According to Brendan Conway, who is in charge of residential investment and developments at top London estate agents Marsh & Parsons, the bond is already proving popular with investors and developers alike. “I can see this becoming the industry norm within just a few months,” he says.

Bonds are already used extensively in Australia, and not just for off-plan purchases. Peter Lane says that takeup in the UK has been encouraging: “Although, as with all innovation, it is the most progressive people who take it up first.”

Developers’ view

You might think that developers, used to taking large deposit upfront, might not be happy with an insurance bond instead. Not so, says Lane: “All they are interested in is knowing that a sale will go ahead.” Nor have developers been able to do anything with the deposit money, which has to be held in escrow accounts and can’t be touched.

So, an insurance-backed bond suits developers perfectly well and can also be used by them as a marketing tool to attract purchasers. In practice, few have done so, although Higgins Homes was first to declare its hand, mentioning the scheme in its advertisements for new developments.

As for investors, there is no doubt that the bond must be decidedly in their favour: “Why, after all, tie up so much money in an incomplete development?” asks Lane.

The period of time that the bond covers can be issued for shorter or longer periods than six months – normally from anywhere between three months and four years – and extended if necessary. It seems such a good idea – so why have we not heard more about it before? “We are a well-kept secret,” concedes Lane, whose firm is regulated by the Financial Services Authority.

His company also has a second product, the General Exchange Bond, aimed at conventional property purchases where someone’s failure to put up a deposit can cause a buying chain to collapse.

With a General Exchange Bond, buyers can wait until completion to release their capital, and not have to take out expensive bridging finance. A typical General Exchange Bond is issued for six months, but can be reissued if there are unforeseen delays. With this type of bond, ExCo insists on dealing via solicitors, who would normally hold the bond on the seller’s behalf.

It is also possible to offer to buy a property subject to the seller accepting a bond. ExCo will talk to both sellers and developers about the scheme. Are there caveats? On the face of it, no – but remember that at completion, as you won’t have paid a deposit, you will have to pay 100% of the purchase price. Secondly, you have a legal obligation to complete the purchase contract. If you don’t, you will forfeit the deposit. The seller will make a claim under the Exchange Bond and ExCo will seek immediate reimbursement from you, taking legal action if necessary to reimburse the buyer.

Application

So, how do you apply for an exchange bond? If you are buying from a developer, the application form is available online for the developer or selling agent to access. If you are making an ordinary property purchase, your legal adviser will need to register with ExCo before getting access to the online application form. Finally, should the property purchase collapse, even with a bond in place, then you will get your money back from ExCo, minus an administration charge.

For bulk investors, more than one bond be taken out, as long as your credit rating check makes it clear that you can meet your financial obligations. Applications for bonds are normally approved in 48 hours.

An even newer bond has been launched by John Charcol and taken up by developers including George Wimpey City on their Falcon Wharf scheme in Battersea, London. This bond works slightly differently, acting as a surety for half of the 10% deposit, meaning that you still have to put down 5%. The remaining 5% is covered by a bond, at a cost of £56 per £1,000 secured, so to fund a £20,000 payment over 12 months would cost £1,120. www.charcol.co.uk

www.exchangebond.com.