Deposit bonds lose gloss

With vacancy rates for inner-city apartments likely to soar over the next 18 months and rental returns falling, buying units off the plan – particularly using deposit bonds to do so – is losing its appeal.

Loans for investment properties have increased to about 30 per cent of banks' lending portfolios currently from just 11 per cent in 1990 with financial products like deposit bonds being a key reason, according to the Reserve Bank.

Apart from capital gains on apartments declining, the upcoming central registry of deposit bonds will put a damper on their use. The registry will prevent investors from holding several deposit bonds, from different issuers, at the same time.

Phil Naylor, CEO of the Mortgage Industry Association of Australia, says deposit bonds are an “excellent product” but they have been “misused”. Andrew Facer, who heads the new registry system, says there's been a lot of bad press about deposit bonds but it's largely been about multiple holders. When people get stuck with half a dozen properties and can't settle on them, that's when they get into financial trouble, he said.