How to exchange on a house with no deposit
By ChrisGilchrist    26th March 2008

Many house builders are offering buyers the ability to exchange contracts without paying the normal 10% deposit - good news for buyers.

The promoters of the Exchange Bond didn’t necessarily expect it to pan out like that. They saw that in the buy-to-let boom, investors wanting to buy several properties with mortgage loans had to come up with 10% deposits on each property when they exchanged contracts.

Instead, they could pay a premium to Exchange Bond, in return Exchange Bond guarantees that the buyer will come up with the money at completion. That would leave the buyer with the 10% cash available to finance another purchase.

The Exchange Bond is growing in popularity
While Exchange Bond is, according to its inventors, still being used in this way, it is being used increasingly as a sales aid by house builders.

George Wimpey is the biggest builder so far to endorse Exchange Bond, but many smaller regional builders - and a South Yorkshire housing association - have done so, and if the market stays as quiet as it is today, it’s a safe bet that more will join them.

Normally, at exchange of contracts the buyer pays a deposit, which has conventionally been 10% of the sale price but is in fact negotiable between buyer and seller.

With Exchange Bond, the buyer pays a premium in return for which Exchange Bond guarantees that the vendor will get the agreed deposit at completion (the bond is technically a financial guarantee, not an insurance policy).

The premium payable depends on the amount and the time to completion. To guarantee a £20,000 deposit (normal on a £200,000 flat), the premium would be £810 for six months. £810 is 4.1% of £20,000, so this equates to an annualised interest rate of 8.2%.

For a £30,000 deposit for 12 months, the premium is £1,735, the equivalent of an annualised interest rate of 5.8%.

Can you get the builder to pay the premium?
Since the rates charged are above deposit account rates, you are paying a bit over the odds to rent money for the period between exchange and completion. But that assumes that it is you who are paying.

In fact, several house builders will now pick up the cost of the premium themselves, which means they are effectively offering a deal where you pay no money at all until completion. At the least, that enables you to earn interest on the amount you’d otherwise have paid as a deposit - which is worth about £500 net on a typical £200,000 purchase.

And since some builders offer this facility, there’s no reason why as a buyer of a new home, you shouldn’t ask other builders to do so too.

Not a free lunch but a good deal
Exchange Bond has been designed around the English legal system and is acceptable to lawyers for private contracts as well.

What happens is that you are contracting to pay Exchange Bond the agreed deposit at completion, and if you fail to pay, then Exchange Bond will pursue you for payment through the courts, just as the vendor of a property would.

So it is not a free option that gets you off the legal hook of your liability - it is only a means of deferring the actual payment until a later date.

Exchange Bond is not keen to admit it, but a prime use of the scheme last year was to finance 100% mortgages - obviously a buyer with a 100% mortgage lined up might well not have enough cash for a 10% deposit, but could stump up for an Exchange Bond premium.

Now that 100% mortgages are rarer than hen’s teeth, Exchange Bond is looking for other markets, and with builders increasingly keen to shift their stocks, it’s a useful addition to the armoury of incentives a builder can offer to buyers.

Article produced by EveryInvestor.co.uk