Exchange Insurance last week launched the exchange bond which it claimed would make the problems a thing of the past for homebuyers needing cash to secure a property exchange.
The bond, says the insurance provider, can be used in place of a deposit by those who may, as yet, not have saved all the money and may have some time to wait before completion on a property purchase.
By way of example, Exchange Insurance says where someone is buying a property costing £200,000 and needs to provide a 10% deposit they can, for "a small premium of £850", use the exchange bond instead.
The buyer gives the seller the bond which acts as guarantee for the deposit and the buyer then has time between the exchange and completion to save the rest of the deposit. Exchange Insurance says bonds are issued for a minimum period of 3 months up to a maximum of four years.
But how necessary is a product like this and are intermediaries likely to advise their clients to take it up?
Sally Laker, managing director at Mortgage Intelligence, has doubts.
“If you think of your average first-time buyer they have first got to understand the mortgage and everything that goes with that. So this product would add an extra level of complexity to the housebuying process that I suspect doesn’t need to be there," says Laker.
“I can’t see it being in massive demand. It’s a very niche product and I don’t think it’s that necessary,“ she adds.
Laker suggests the bond might work well for new build developments where buyers sometimes have to wait up to a year or longer before they can complete on a sale. But given the fact its usage might remain restricted to new build properties, it's thought the concept might never become mainstream as many new build developers are, says Laker, often prepared to work out a deal with prospective buyers directly anyway.
“The best advice would be to tell people to talk to the developer and do a deal with them direct,” Laker says.
Jane Harrison, marketing director at L&C, has similar doubts about the bond and suggests it will encourage prospective homebuyers to “commit before they are ready”.
“It is an expensive way to buy you time to save a deposit. A £850 premium for a bond covering a 10% deposit on £200,000 works out as 4.25%. So you are paying 4.25% of your deposit to buy you time.
“Of course, developers will like this as if someone cannot save the deposit in time they will still get their money and will also still have the property to sell to someone else should it fall through.”
Harrison adds it is not a product L&C will be recommend, as she says there are few circumstances where such a bond would be either practical or necessary where she feels there is little benefit to the buyer.
She also suggests the product is symptomatic of providers coming into the mortgage market with products from other countries, such as Kent Reliance’s recent launch of the never-ending mortgage, which are unlikely to work in the UK .
“Conditions in the market are not so tight that there is a rush every time new homes are built. There isn’t massive competition for homes,” she adds.But Nick Gardner, director at Chase De Vere, defends the concept of the bond saying: “The Exchange Bond has several good uses and we are advising our clients to use an Exchange Bond as firstly it can potentially be cheaper and less risky than a bridging loan, secondly it protects purchasers if a developer goes bust and finally for off the plan purchases where there can be a long gap between exchange and completion. For a relatively small premium the Exchange Bond means that our clients can invest their money elsewhere or not have to dip into their stocks and shares or savings.”
The problem with the exchange bond in the end, suggest intermediaries, is not only does it look expensive but it also looks fairly unnecessary. And for borrowers the advice appears to remain the same - save for a deposit before considering buying a property. There are no quick fixes.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Matthew West on 020 7484 9893 or email [email protected].IFAonline
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First mentioned in Cridland Report