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When you venture into the realm of home ownership, navigating the many financial aspects can be daunting. Two terms that often cause confusion are "down payment" and "deposit." In this blog, we will work through the differences between a deposit and down payment in order to give you a clear understanding of their roles in the home buying process.
Understanding Down Payments
A down payment is a large upfront payment made by the homebuyer towards the purchase price of the property. The amount needed for a mortgage is determined by subtracting the down payment from the purchase price of the home. For example, if you have a $100,000 deposit and have purchased a home for $700,000, then your mortgage needed would be $600,000. The larger your down payment is, the more house you will be able to afford!
Down payments can come from a variety of sources, including personal savings, gifts from relatives, TFSA’s, RRSP’s and more. If you want further information, please visit our Buyer Resources page HERE.
In Canada, the down payment amount required is a percentage of the home's price, and it plays a crucial role in determining your mortgage eligibility with any lender. We have included a chart below highlighting the minimum down payment requirements.
Q&A: Understanding Deposits
Unlike down payments, deposits are an up front monetary commitment made by you, the buyer, upon the acceptance of an offer. The deposit is a sign of good faith to the Seller on two different fronts: to show you have money to purchase the home, and to show immediate financial commitment to the deal. Oftentimes, the deposit is a portion of the down payment that you will be using towards the purchase of the home.
HOW MUCH IS A DEPOSIT SUPPOSED TO BE? IS THERE A NORMAL AMOUNT?
There is no set amount for a deposit. A deposit is negotiable on any home purchase and is an agreed upon amount by both the buyer and the seller. Although negotiable, a deposit amount is typically between 5-10% of the purchase price. It's up to the listing agent and seller to indicate what they want in the listing, and every listing will have this information for you as the buyer.
IS A DEPOSIT CREDITED TOWARDS THE PURCHASE OF THE HOME ON CLOSING?
You bet! In the majority of purchases, the deposit will be a portion of your allotted down payment for the purchase of a home. For example, if you have a $50,000 as a down payment the agreement to purchase requires a $25,000 deposit, then you will take $25,000 from your down payment and put it forward as a deposit on the home. Both the lawyer and mortgage lender will receive documentation that a portion of your down payment has been used as a deposit, so you can be assured it will be credited towards the purchase of the home.
DO I LOSE MY DEPOSIT IF I BACK OUT OF A CONDITIONAL OFFER?
No. If a deal is conditional and falls a part, in the condition clause on the offer it will state that the deposit is to be returned to the buyer in full.
DOES A DEPOSIT NEED TO BE GIVEN ALL AT ONCE?
No it does not. In some cases, a buyer will choose to bring one portion of the deposit upon an agreement being reached, and then a further deposit after the conditions have been removed (or by a certain date). These terms would be written into the offer, with the amounts to be brought and the times at which they are to be deposited.
WHO HOLDS ONTO THE DEPOSIT?
In most circumstances, it will be the listing agent’s brokerage who will hold onto the deposit. This is the case in most transactions, although sometimes the funds will be held by the buyer agent’s brokerage or by the seller’s lawyer.
Conclusion:
In summary, grasping the differences between down payments and deposits is pivotal in the landscape of home buying. Your down payment determines mortgage eligibility and affordability. Deposits, a testament of commitment, play a crucial role in securing a deal. By understanding exactly what the difference between a deposit and down payment you are one step closer to making an informed purchase of a home. If you ever have questions about the home buying process, we are always here to help.
