Congratulations!

You have browsed through tens, if not hundreds, of houses for sale in Toronto on the search for your dream house. And you have your heart set on one particular property that can be your next home. You have a pre-approved mortgage, and everything seems to be aligned perfectly.

This is the stage where you may be asked to put down a deposit. And if you have not really paid attention to this term before, you may be mistaken for mixing it up with the down payment, leading to potential chaos and heartbreak.

Deposits and down payments both involve money being paid to the seller upfront. However, they serve different purposes and occur at different stages of the home-buying process. 

Understanding the difference between these two payments becomes important for a potential property investor, especially a first-time home buyer in Canada.

Well, let’s get started and start from the basics.

What is a Down Payment?

This is a popular term and something that most Canadian buyers have heard of.

The down payment is the portion of the property’s purchase price that the buyer pays out of pocket, excluding any

amount. This payment is generally made at the closing of the transaction and is a critical part of securing a mortgage.

Key Points about Down Payments:

When? 

The down payment is made at the closing stage of the home-buying process.

How Much? 

In Canada, the price of the home determines the minimum down payment.

For houses priced at $500,000 or less, the minimum down payment is 5%.

For houses that have a price tag between $500,000 and $999,999, the minimum is 5% of the first $500,000 and 10% of the remaining amount.

For homes priced at $1,000,000 or more, the minimum down payment is 20%.

Why?

A down payment cuts down on the amount the buyer needs to borrow, thereby lowering the -to-value (LTV) ratio and potentially securing better mortgage terms.

Additional Info

If the down payment is less than 20% of the home’s purchase price, mortgage insurance is an essential requirement so that the lender is protected in case of default. The Canada Mortgage and Housing Corporation (CMHC) issues mortgage insurance.

What is a Deposit?

The deposit is the money a buyer pays to the seller or their representative when making an offer on a property. 

This payment demonstrates the buyer’s firm commitment to the purchase. As well as a sign of good faith, the deposit is proof to the seller that the buyer is serious about their offer. It also serves as a sort of marker so that other buyers know that the property is no longer on the market.

Key Points about Deposits:

When? 

During a house-buying transaction, the deposit is typically paid when the buyer’s offer is accepted.

How Much?  

While there’s no fixed amount, deposits usually range from 5% to 10% of the property’s purchase price. The exact amount varies based on market conditions and the seller’s requirements.

Why?

A deposit serves two purposes: it secures the buyer’s offer and takes the property off the market, indicating proof of a buyer’s serious intention to proceed with the sale.

Additional Info:

In certain instances, the deposit is usually refundable – this can happen if the deal falls through due to conditions not being met (such as financing or home inspection conditions). 

However, if the buyer backs out and their reasons are not covered by the conditions, they may forfeit the deposit.

Deposit vs. Down Payment

While both the deposit and down payment involve upfront money from the buyer, they are different from each other.  Let us look at how they differ:

Stage in Process:

The deposit is paid early, usually when the offer is accepted.

The down payment is made later, at closing.

Function:

The deposit secures the buyer’s firm interest in the property and shows commitment to the seller.

The down payment is part of the upfront purchase price to reduce the mortgage amount.

Risk:

The deposit may be refundable if certain conditions are not met, but there’s a risk of forfeiture if the buyer backs out without valid reasons.

The down payment is non-refundable as it goes directly towards the home’s purchase price.

Practical Considerations

Buyers should ensure they have enough money to cover both the deposit and the down payment. The deposit is typically due shortly after the offer is accepted, while the down payment is due at closing.

A deposit shows serious intent – this knowledge can be used as a negotiating tool. A higher deposit might make an offer more attractive to a seller, especially in a competitive market.

Potential buyers must have secure financing and be ready with a down payment to avoid last-minute issues that could derail the purchase.

It’s All About Money!

Cruising the Canadian real estate market requires a good understanding of the many financial terms and their implications for your investments.

While both the deposit and down payment are essential, they serve different roles in the home-buying process. The deposit acts as a show of good faith early in the transaction, while the down payment is a substantial financial commitment made at closing. 

By understanding these differences, buyers can better prepare financially and conduct real estate transactions with greater confidence. Of course, we recommend consulting a trusted real estate brokerage, such as Save Max, to be your faithful partner on your real estate journey.