The difference between a deposit and a down payment
When purchasing a property, you will need to know how much of a deposit you wish to put down on a home, and how much down payment you will be making. These terms can be confusing – but hopefully this information will help!
A deposit is paid when your offer to purchase a home is accepted, and becomes a part of the overall down payment. It is considered ‘good faith’ money and must be provided (usually) within the first 3 business days of signing the contract (although in hot markets the seller may expect it the next business day). The funds are usually provided in a bank draft or electronic transfer/wire transfer to the seller’s brokerage. They are held ‘in trust’ while the buyer starts working on conditions like financing, home inspection or condo document review.
Waiving, or not waiving, conditions
If the buyer waives the conditions, the purchase is final, and the deposit stays with the seller’s brokerage and becomes part of the down payment. At this point the property is sold!
If the buyer does not waive conditions, the buyer gets the deposit back. This can happen if the buyer does not get financing, or if something is too concerning with the home inspection or condo document review for the buyer to comfortably move forward with the purchase.
How to lose the deposit
The buyer will lose their deposit if they walk away from the purchase after waiving conditions but before possession. In Alberta, the deposit is then split between the seller and their REALTOR®, and the seller can sue the buyer for damages the seller may incur, such as if the property sells for less later, or if they incur costs because they cannot complete the sale of a home they are purchasing.
A down payment is money the lender requires you to invest in the purchase of your home. The purchase price of the home, minus the deposit and a down payment, make up the amount of the mortgage you will secure. In Canada, in order to obtain a mortgage from certain lenders and to be eligible for mortgage default insurance, you must have a minimum down payment of 5%. If you put over 20% down on a home, you may not be required to pay mortgage default insurance.
How much deposit and down payment should I make?
How much deposit you put down often depends on the purchase price of the home, but it also depends on whether you are in competition for the home. If you are in competition – it may help to put down a larger deposit, to demonstrate to the seller that you are a serious buyer!
How much down payment is a discussion for you and your mortgage broker, as you may want to factor in any repairs or improvements you want to make with the house.
The above information is provided as general information and is not considered legal advice. Please consult your lawyer if you have any questions or concerns about this information.