What is a deposit?
A deposit is the money included with a purchase contract as a sign of good faith when you offer to purchase a property. It’s the “consideration” that helps make up the contract and binds you to the agreement.
In Ontario, you typically would provide a certified cheque or a bank draft which the listing real estate brokerage holds in the brokerage trust account, while conditions are being fulfilled. Conditions could include but are not limited to, financing, home inspection, etc. During this time, the purchasers could backout of the purchase and their deposit would be refunded.
Once the conditions are waived, you have committed to buying the property and your deposit is transferred to the lawyer’s trust account and included as part of your down payment. However, if you don’t complete the transaction, your deposit would be forfeited to the seller. There also may be other ramifications for cancelling the purchase.
The amount you put forward as a deposit when negotiating the terms of a purchase contract is arbitrary, meaning there isn’t a set or standard amount and amounts can vary. It’s best to discuss this with your real estate agent as your deposit can be a negotiated.
What is a down payment?
Your down payment refers to the initial payment you make when buying a property through mortgage financing.
In Canada, the minimum down payment amount is 5%, as lenders can only lend up to 95% of the property’s value. Securing mortgage financing with anything less than 20% down is made possible through mortgage default insurance (CMHC as an example). You can source your down payment from your resources, the sale of a property, an RRSP, a gift from a family member, or borrowed funds.
Example scenario
Let’s say that you are looking to purchase a property worth $600,000. You’re planning on making a down payment of 10% ($60,000). When you make the initial offer to buy the property, you put forward $10,000 as a deposit which the listing real estate brokerage holds in their trust account. If everything checks out with the home inspection and you’re satisfied with financing, you can waive all conditions. Your $10,000 deposit is then transferred to the lawyer’s trust account, where you will add the remaining $50,000 for the down payment.
With your $60,000 down payment made, once you sign the mortgage documents and cover the legal and closing costs, the lender will forward the remaining funds in the form of a mortgage registered to your title, and you have officially purchased the property!
If you have any questions about the difference between the deposit and the down payment or any other mortgage terms, please give me a call!