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Deposit insurance

Exchange Insurance Company, a specialist European insurer regulated by the FSA has come up with a new product that could benefit many buy-to-let investors. Their product is called Exchange Bond and it provides, through an insurance scheme an alternative to the deposit required by the seller when contracts are exchanged. What the Bond does is give a guarantee to the seller that the buyer will hand over 100% of the purchase price on completion. If they fail to do so, then the Insurer will pay the seller the agreed deposit monies within 7 days of a valid claim.

The advantage to the investor of this arrangement is that they avoid having to tie up their capital in the deposit prior to completion. This insurance is probably most useful for investors buying ‘off plan’, where the period between exchange and completion can be many months. The Bond can be written for a period of between three & forty-eight months.

What will it cost?Someone buying a property costing £200,000 and wanting an Exchange Bond in place for a deposit of 10% would be required to pay a premium of £850 to cover a six-month gap between exchange and completion. This could be considerably less than the cost of a short-term loan for the buyer. When used in conjunction with a discounted purchase, the scheme opens up the possibility to investors of being able to purchase new developments using virtually no personal capital. The merits of this should obviously be very carefully evaluated before such an approach is pursued.

Exchange Insurance has secured agreements with leading developers in the UK including; George Wimpey, David Wilson Homes and Higgins Home to accept the scheme. Some developers will even offer to refund the initial premium paid for the Exchange Bond on completion as an incentive. This means the facility effectively becomes free of charge.

Its use is not restricted solely to new homes being built and sold ‘off-plan’. It can also be used in the purchase of existing homes subject to certain conditions being met.

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