Why Banks are shying away from issuing Bank Guarantees
A bank guarantee is an undertaking issued by a bank to a beneficiary for a specific amount of money that has the effect of guaranteeing the liabilities or commitments of one party to another. A bank guarantee cannot be issued unless the bank has some type of asset security backing the face value of the guarantee, usually either cash or real estate property.
In the not too distant past, banks were happy to issue a Bank Guarantee to facilitate the deposit for a property purchase. However, in more recent times they are not a product that the banks like to issue and there are a few reasons why.
In the current lending and compliance environment, when a customer applies for a bank guarantee to cover the deposit needed to secure a property, banks are required to undertake a full due diligence process on the property buyers. That means a borrowing capacity assessment and full loan approval for the property purchase not just for the deposit amount. As mortgage brokers can readily attest, such approvals are taking weeks to secure. And this process comes at a cost to the bank. In addition, a bank guarantee when secured over property, requires a mortgage to be taken over the property. Mortgage documents need to be prepared and issued which also comes at an additional cost to the bank.
As a result of this, the bank needs to recoup these costs by charging establishment fees and ongoing fees. Often times however these establishment costs the bank incurs are not fully covered from fees that are generated from issuing the bank guarantee. In other words, the bank is potentially losing money from issuing the bank guarantee, which obviously isn’t a great business model. Consequently, they are not a product that banks prefer.
A Deposit Power Guarantee or Deposit Bond, has a number of advantages over a bank guarantee. The fundamental one is that the purchaser does not have to provide any security to the issuer of the Deposit Guarantee. As a consequence, they can be issued very quickly in a matter of hours. This is a great advantage for brokers and their customers as we all know time is money. As Deposit Power does not charge any establishment or ongoing fees, they can often be more cost effective too.
So next time your customer is considering a bank guarantee to secure their deposit for a property purchase, think Deposit Power.