As part of the mortgage process, there’s a lot of confusion around the differences between the deposit and down payment. It’s important to understand what sets them apart. This way, you aren’t confused when it’s time to secure financing on a property once you have an accepted offer.
A deposit, in real estate, is money you include with a purchase contract as a sign of good faith. It is the “consideration” that helps make up the contract. It also binds you to the contract. Typically, when you make an offer to purchase on a property, you would include a certified cheque or a bank draft the real estate brokerage holds while finalizing negotiations. If a seller accepts your offer, the deposit goes “in trust” until just before your mortgage closes. The final step is transferring the deposit to the lawyer’s account and including it as part of your down payment.
If you can’t reach an agreement, you will get your deposit back. However, if you come to an agreement, and then you back out, you forfeit the deposit to the seller. The deposit is separate from the down payment in that it’s money that goes ahead of the down payment in the negotiation of the purchase. However, once everything is finalized, the deposit is then included and makes up part of the total down payment.
The amount you put forward as a deposit when negotiating the terms of a purchase contract is arbitrary. This means there is no predefined or standard amount. Instead, it’s best to discuss this with your real estate professional, as your deposit can be a negotiating factor in and of itself. A larger deposit may give you a better chance at an accepted offer in a competitive situation. It also puts you on the hook for more if something changes down the line and you aren’t able to complete the purchase.
The down payment is the initial payment you make when you buy something on credit. In Canada, as it relates to the purchase of real estate, the minimum down payment amount is five per cent. This means that you have to come up with a minimum of five per cent of the total price of the property you are purchasing. The lender will allow you to borrow the remaining 95 per cent of the property value on credit through mortgage financing.
If you have 20 per cent of the purchase price of the property available for a down payment, you may qualify for conventional financing. This means you don’t have to pay for mortgage default insurance through a provider like CMHC.
Let’s say that you are looking to purchase a property worth $400k. You’re planning on making a down payment of 10 per cent or $40k. When you make the initial offer to purchase on the property, you put forward $10k as a deposit. Your real estate brokerage holds this deposit. The sellers aren’t comfortable with that amount, and they request you increase the deposit by $5k. You agree to these terms and the contract is finalized, then you would then send another $5k to your real estate brokerage trust account, making a total deposit of $15k.
Your deposit is held in trust until such time that it is sent to the lawyer’s trust account where it’s combined with the remaining $25k that you will be using for the down payment. It’s not rocket science, but as there are a lot of moving parts, it’s good to go through it in detail.
If you have any questions about the deposit, and how it plays into the down payment, please let me know. And if you have any other mortgage questions or simply want to discuss your personal financial situation, give me a call at (705) 333-4338 or get in touch with me here!