Deposit vs Down Payment

This is a question I'm often asked by people across the board; people who have owned homes for years, and brand new buyers. 

So, what is a deposit? The definition of deposit by the Ontario Real Estate Association (OREA) is "payment of money or other valuable consideration as pledge for fulfillment of a contract". What does this ACTUALLY mean for you, the buyer? You will see on the first page of your offer (or Agreement of Purchase and Sale) as part of the deposit clause, that within 24 hours of acceptance of the offer (ie you and the seller have negotiated back and forth and have come to an agreement - this is before you do the home inspection and firm up your financing) you need to bring a cheque, usually a personal cheque is fine, to the listing agent's office. For example, if you come to an agreement with the seller by noon on Wednesday, you need to have that cheque to the office by noon on Thursday.

Another question I often get with this is how much to give for a deposit. There's no hard and fast rule. It tends to vary region to region. In my experience in the Ottawa area, it's usually about 1% of the price. So if you buy a $300,000 home, a fair deposit is $3,000.

So where does the down payment come into play? The down payment, as defined by the BC Real Estate Association (BCREA), is "the part of the purchase price of the property that the buyer pays in cash and does not finance with a mortgage". At the moment in Canada, the minimum down payment amount is 5%. Using the same $300,000 house, your total down payment must be at least $15,000.

On the plus side, your deposit goes toward your down payment. If we keep the general idea I've suggested, you will pay $3,000 at the time of offer, and the remaining $12,000 will be due the day you get your keys. That means that, if you don't move in for 2 months, you still have that time to finish saving up for that amount. The additional bonus here is that your first mortgage payment comes out the month AFTER you move in, so this way you're not stuck with a big down payment along with your mortgage. 

For more financial advice, I always recommend talking to a professional. Dilys Hagerman is one of the top mortgage brokers in Canada, offers free advice and, more often than not, you don't pay her any fees! For legal advice, it's always best to talk to your lawyer. I can probably recommend one in your area.

I hope this has been educational for you. There are so many details to be worked out as you navigate a real estate transaction, and there are no stupid questions! Good luck!!

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