The Difference between Your Deposit and Down Payment

If you’re a first-time home buyer, it’s easy to get your deposit and down payment mixed up. Although the process does not change in anyway for other buyers; the only thing that differs is the cost. It is very crucial o estimate this cost in the budget as these are two important steps in the home-buying process and happen at two different times. 

Your Deposit

If you’re a renter, you should know what a deposit is. When you sign a lease to rent an apartment, you’re usually asked for a security deposit from your new landlord. To show that you’re serious about renting an apartment, you’ll pay your landlord first and last month’s rent.

The deposit you pay when you purchase a home is very similar. When you find a home and you’re ready to make an offer, you’ll also need to make a deposit. Your deposit shows the home buyer you’re fully committed to buying their home. The deposit counts towards your down payment. If you have a dispute with the seller, they are able to hold onto your deposit or in extreme cases keep it as damages. Deposits usually come in the form of bank drafts, certified cheques and money orders, but you may soon be able to make your deposit with the convenience of mobile payment.

If you’re the successful bidder on the home, your deposit should be held in trust by the real brokerage of the seller’s agent. You should never pay the deposit directly to the seller, as they could take your money and leave you high and dry. As the buyer, typically you receive interest on your deposit (provided it’s written into the Agreement of Purchase and Sale). Although there’s no hard and fast rule about the size of a deposit, 5 percent is the amount most buyers go with. It can be risky to go with anything less, as the seller may think your finances aren’t in order.

Down Payment

When the seller accepts your offer, the next lump sum you’ll need to shell is on your down payment. Your down payment is paid on closing day. Your down payment is the money you've scrimped and saved over the last few months or years to buy a home.

Down payments sizes can vary. If you’re fortunate enough to be able to afford to buy your home in cash, your down payment will be the same as your purchase price. If you’re like most home buyers and need a mortgage, your mortgage amount will be the difference in purchase price and down payment.

The minimum down payment you can make in Canada is 5 percent. If you make a down payment between 5 percent and 20 percent, your mortgage is considered high-ratio and you’ll have to pay mortgage insurance premiums. If your down payment is greater than 20 percent, you’ll qualify for a conventional mortgage and avoid costly mortgage insurance premiums.

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