Wait, there's a difference?
A frequent point of confusion for anyone new to purchasing real estate is the difference between the deposit and the down payment. One makes up part of the other, but the way the money flows in a real estate transaction can confuse the new buyer. I'll try to explain how it works in this blog post.
The Down Payment
The down payment is the amount of money you pay towards your new home purchase. There is no 'standard' amount, but there are rules.
In Ontario, the minimum deposit on a home under $499,999 is 5%.
The minimum deposit on a home under $999,999 is 5% of the first $499,999 and 10% of the rest.
The minimum deposit on a home over $1,000,000 is 20%.
If your deposit is under 20%, in any case, you are subject to mortgage insurance.
The downpayment you select is applied directly to the cost of the home. If you purchase a home for $1,000,000 and put a down payment of 20%, that's $200,000, which leaves a mortgage requirement of $800,000.
Understanding the down payment is easy stuff, but what about the deposit?
The deposit is money you give to the listing brokerage with (or upon acceptance of) your offer.
There is no minimum amount or 'standard'. The amount of money you choose to use as your deposit is an indication of your intention. It's an essential point of consideration when you're submitting an offer to buy a home.
The larger the deposit, the higher your intention to purchase the home.
In a market like Toronto, it's not unusual to see a deposit of 5% of the total cost.
So hold on, does that mean you're paying 25% upfront on a $1,000,000 purchase? No.
The deposit indicates an intention to buy. That deposit forms part of your down payment. In our $1,000,000 example, a 5% deposit would form part of your 20% down payment. You would put down a deposit of 5% and then 15% would be due on close.
The place I see most people trip up in the deposit/down payment topic is in timing. The deposit is due upon offer acceptance. The down payment is due on closing.
Why is this an issue? The deposit is due 24 hours or less from offer acceptance in the form of a bank draft. A bank draft is only available if funds are liquid in your chequing or savings account.
When new buyers are shopping for homes, they can get into a situation where they find a beautiful home that checks all the boxes. They rush out to get a real estate agent to help them last minute, and they don't realize that their money is wrapped up in investments, stocks, bonds, TFSA's, or RRSP's.
When you withdraw money from these investment tools, there is usually a settlement period of 3 days (sometimes shorter, sometimes longer).
If you've offered on a home and haven't liquidated your investments, your offer will be void when you don't deliver your deposit.
You'll have lost your dream home due to an investment settlement period. That sucks.
It's always best for you to talk to your agent before you begin to look at homes. There are nuances to buying real estate, and a seasoned agent can help you navigate through them.
Preparation is crucial in real estate.
Click here to read our Ultimate Guide to Buying a House in Toronto
I hope this helped you understand the difference between the deposit and down payment and if you have any questions, please feel free to reach out any time.