You finally have your dream home and you are going to make an offer when you see the word “deposit” on on the paperwork. Did not you discuss this with your mortgage broker when trying to determine your “down payment”?
The answer is no – deposits and down payments are two very different things to consider in any real estate transaction. No wonder it can be confusing!
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.
If you bid on a property, a deposit is expected to show how serious about the property are. Similar to a rental deposit, it shows that this is the place you want to live.
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.
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 amount of money you put towards the purchase price, to take a smaller loan. 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).
In short, the down payment is the money you give the seller to accept an offer and to show that you are motivated and serious about the deal. The down payment is the amount of money you put down on the mortgage – which has to be at least five percent of the purchase price.
If you have any questions, please leave a comment or give us a call at 905-689-9223 and one of our sales representatives would be more than happy to go through this with you!