The Difference Between Deposit and Down Payment

You finally found your dream home and you are planning to make an offer but may have questions on what the difference is between a deposit and a down payment.  I frequently have clients ask this question.  Deposits and down payments are two very different things to consider when deciding to buy a property, although both require savings.  They occur at different stages during the buying process.  
 
Below is an overview of what these two terms mean and what you should be aware of.

Deposit

When you place an offer on a property you have the option to submit your deposit with your offer or when the offer is accepted.  The deposit tends to anywhere between 3 – 5 percent of the purchase price and the purpose of the deposit is to show that you are serious about buying the property.  In a seller’s market, it is not uncommon for the deposit to accompany the offer to demonstrate that you are really serious but it can also be sent to listing brokerage once the offer is accepted and you would have the following business day to deliver the deposit to the seller’s brokerage.  Deposit are either a bank draft, certified cheque, or bank transfer.  
 
If your offer is accepted the deposit is held in a trust account by the listing brokerage – which protects you the buyer if the seller or brokerage goes bankrupt.
 
The other question that I frequently get is what happens to the deposit if the buyer has a problem fulfilling the conditions (if there are any conditions) and as a result does not want to proceed with the purchase.  There is no simple response to this question as the deposit cannot be released unless both the buyer and seller agree to release the deposit.  In situations where a condition is not met the seller could possibly refuse to release the deposit if they believe that the buyer is not acting in good faith and has simply had a change of heart and wants to not proceed with the purchase.  In these situations, legal advice should be sought.
 
The deposit ultimately gets applied to the purchase price just like the deposit.

Down Payment

Once the offer has been accepted and the deposit has been provided to the listing brokerage.  The next financial commitment is the down payment.  The down payment is the amount of money that the buyer puts toward the purchase price which as a result reduces the mortgage amount required. 
 
In order to purchase a home in Canada buyers require a down payment of a minimum of 5% of the purchase price.  So if you are purchasing a property for $700,000 your down payment must be at least $35,000 but with a 5% down payment, you will need to purchase mortgage default insurance if you want to avoid purchasing the default mortgage insurance you will require a minimum down payment of 20% of the purchase price. 
 
The balance of the down payment plus lawyer fees and disbursement fees are paid by the seller to their lawyer on closing (or a day or two days prior to closing.  If there is a mortgage on the property the financial institution forwards the mortgage funds to the buyer’s lawyer so that the funds can be forwarded to the seller’s lawyer on closing day.
 
If you have any questions please don’t hesitate to reach out at (647) 622-7869 or smith.sylm@gmail  and I would be more than happy to answer any of your questions.