You finally have your dream home and you are going to make an offer when you see the word “deposit” on on the paperwork. Is this just another word for “down payment” or is it something else altogether?

It get’s confusing, but deposits and down payments are two very different things to consider in any real estate transaction.  Although both require saving, they occur at different times during the transaction. Let’s look at what these terms mean and what you need to know and when.

Deposit

If you bid on a property, a deposit is expected to show how serious you are. Similar to a rental deposit, it shows that this is the place you want to live. Once a seller accepts your offer, you make a deposit quickly, usually within 24 hours.

Deposits are usually in the form of a bank transfer or certified check. The deposit amount is decided between you and your realtor and really depends on the local property market. Expect the deposit to be between one and five percent of the purchase price.

If the offer is accepted, the deposit is likely to be held in trust by the listing broker agent. This offers you buyer protection if the seller goes bankrupt. It is also protected by the insurance company, so even if the agency goes bankrupt, you can get your money back.

A question often arises, can the buyer can get the deposit back if there is a problem with the fulfillment of the conditions or if the buyer does not want to go ahead with the purchase? There is no simple answer to this, as every situation is different.

However, the deposit cannot be released until both parties agree. If a condition is not met, the seller may refuse to release the deposit if they believe the buyer is not acting in good faith.

Another thing to consider is that not paying the deposit doesn’t make the deal null and void. If the seller chooses to sell the house to someone else and not be able to get the same purchase price, you can be sued for the difference and the cost of legal fees. Placing an offer on a house is serious business, and you should only ever take this step if you intend to move forward.

Down Payment

Once you have paid the deposit and the offer is in, it’s time to look to the next phrase, the down payment. The down payment is the total amount of money you put towards the purchase price. This amount actually includes the deposit, which you have already made.

Generally speaking, the higher your down payment, the smaller loan you require and the less interest you’ll pay over time. This is where the savings really comes into play which can help you pay a lower mortgage rate!

In Canada, you have to put down a minimum of 5 percent of the purchase price. For example, if you bought a house for $400,000, you would have to put at least $20,000. However, if you want to avoid mortgage default insurance you want to pay at least 20% ($80,000 in this case). Suppose you pay 20 percent, your payment will be deducted from the purchase price, and what is left is the amount you need to finance with your bank. For example: $ 400,000 (purchase price) – $ 80,000 (down payment) = $ 320,000 (mortgage loan amount).

Do you have more questions about buying or selling a home? You’ll find more answers in the posts below:

• Fact Vs Fiction About Working With A Real Estate Agent
• FSBO vs Real Estate Agent Assisted Sales: What’s Better?
• What’s in Your Listing Agreement?

Summary

In short, the deposit is the money you give the seller right away to accept an offer and to show that you are motivated and serious about the deal. The down payment is the amount of cash you pay towards the house. Upon closing day, the deposit gets added to the rest of your down payment. The funds are released to the seller, along with the money from your   mortgage – and you then take possession of your brand new home!

If you have any questions, please leave a comment or give us a call at 905-332-9223 and one of our sales representatives would be more than happy to go through this with you!