The Difference Between Your Deposit and Down Payment

When you find a house and make an offer on it, you'll make a deposit on it. Like the landlord, you want the seller to know you're serious. But ... TheDOT Auto Home Travel Life CreditCards Mortgages PersonalFinance Savings Data News TheDOT Auto Home Travel Life CreditCards Mortgages PersonalFinance Savings Data News News&Resources Mortgages101, Mortgages TheDifferenceBetweenYourDepositandDownPayment GaryHilson June20,2020 2mins Email Tweet Post Share It’seasytoconfuseyourdepositwithyourdownpayment,especiallyifyou’rebuyingahouseforthefirsttime.Butalthoughbotharesubstantialsumsofmoneyandmustbeinyourbudgetalongwiththecostofhomeinsurance,theyaredifferentanddistinct.TheDepositRentersarenostrangertodeposits.Whenyousignaleaseonanewapartment,yournewlandlordwillaskyouforasecuritydeposit.Oftenthisdepositisintheformofpayingyourlastmonth’srent,eventhoughyoumaynotknowwhenthatis.Itshowsyou’reseriousaboutrentingtheunit,andyou’llgetthemoneybackaslongasyoutreattheapartmentwellandmeetalltheconditionsofyourlease.Purchasingahomealsorequiresadeposit,butit’salittledifferentthantheoneyoupayalandlord.Whenyoufindahouseandmakeanofferonit,you’llmakeadepositonit.Likethelandlord,youwantthesellertoknowyou’reserious.Butunlikethedeposityoumakeonanapartment,you’renotgoingtogetitback.Instead,itgoestowardyourdownpayment.Thisdepositisrequiredwhenyouwriteanoffertopurchaseapropertywithyourrealestateagent.Thisdepositdoesn’timmediatelygototheseller,however.Asthesuccessfulbidderontheproperty,yourdepositshouldbeheldintrustbytherealestatebrokerageoftheseller’sagent.Intherareandextremecasethatyouhaveadisputewiththeseller,theycanholdontoyourdepositorkeepitasdamages,buttheycan’tjusttakethemoneyandrun.Thesedepositsusuallytaketheformofcertifiedcheques,bankdraftsandmoneyorders,althoughsoonyoumaybeabletopayitthroughanelectronictransfer—onyourmobiledevice,noless.Justlikeyourlastmonth’srent,yourdepositasthesuccessfulbuyerofthehomewillaccumulateinterest,providedit’swrittenintotheAgreementofPurchaseandSale.Butunlikethedepositonanapartment,thesizeisalotbigger.Mostbuyerswillwanttomakeadepositthat’satleast5%ofthepurchasepriceasittellstheselleryourfinancesareinorder.Ingeneral,thedepositamountisguidedbythepurchasepriceaswellashowquicklyyou’llbeclosingthedeal.Whenthesaledoesclose,thisdepositwillbeappliedagainstthetotalpurchasepriceandbecomespartofthedownpayment.Inmostcases,yourdepositislostifthesaledoesn’tclose,althoughoffersthathaveconditionsattached,suchastheneedforapropertytopassahomeinspection,canbeexceptionsthatwouldseeadepositreturnedtoyou.Butyouifmakeanofferandchangeyourmindaboutpurchasingthehouse,notonlywillyoulikelyloseyourdeposit,youcouldalsofaceapotentiallawsuitforanydamagessufferedbytheseller.TheDownPaymentIfyouthoughtthedepositwasalargelumpsum,waituntilyoumakethedownpayment—it’sgoingtobeatleastthesameamount,butideally,you’llwanttopaymorethan5%.Thedownpaymentispaidthedaythesaleofthehousecloses,andformostfirst-timehomebuyers,itrepresentsyearsoftightbudgetingandsaving.Likethedeposit,itshouldbeatleast5%ofthepurchaseprice,butthemoreyoucanputdownthebetter.It’srareforfirst-timebuyerstobeabletobuyanewhouseoutright,andyourdownpaymentwilloffsetwhatyourmortgagewillbe.Mortgagelenderswillalsowanttoknowthesourceofyourdownpayment.Butwhile5%istheminimumdownpaymenttofinanceahomewithamortgage,themoreyoucanpaythebetter—20%isidealforaconventionalmortgage.Otherwise,yourmortgagemaybepeggedashigh-ratio,andyoumayhavetopaymortgageinsurancepremiums.TheMortgageInsuranceIfyoucan’tmakeadownpaymentofatleast20%,mortgagedefaultinsuranceismandatory.InCanada,therearetwoprivate-sectorproviders,butmostnewhomebuyerswilllikelythinkoftheinsuranceofferedbytheCanadaMortgageandHousingCorporation(CMHC).Thisinsuranceprotectslenders—typically,thebankthatprovidesyouwiththemortgage—intheeventyoustopmakingpaymentsanddefaultonthatmortgage.Asahomebuyer,thisinsurancewillcostyouanywherebetween2.8%and4%ofyourtotalmortgageamount.Althoughitdoesaddtotheoverallamountyoupayforyourhome,itallowspeoplewhocan’tsavethe20%downpaymenttoaccesstotherealestatemarketandkeepsmortgagerateslowbyreducingtheoverallratesofdefault.Regardlessofwhetheryou’reabletomakethe20%downpaymentandavoidtheneedformortgageinsurance,thistransactionandyourdepositareprobablythebiggestsumsofmoneyyou’llgiveanyoneinyourlifetime.It’sessentialtounderstandthedifferenceandyourobligationstoeveryoneinvolvedinthepurchaseofyourfirsthome. GaryHilson GaryHilsonisaToronto-basedfreelancewriterwhohasproducedthousandsofwordsforprintandpixelaboutbusinessandtechnologyforavarietyofpublicationsandcorporateclients.Whenhe’snottappingonthekeyboard,Garycollectscomicbooks,attendslivetheater,constructsLego,andbuysbookshealwaysintendstoread. Latestlifeinsurancearticles 10MythsAboutLifeInsuranceBusted–SomeMaySurpriseYou Youmaybeyoungwithnokidsandnomortgage.Lifeinsuranceisforsomeoneolder,whohasdependentsright?Wrong.Let’sdebunklifeinsurancemythsandlearnwhyeveryoneneedssomeformofcoverage. LearnMore 6minsread LiamL. Jun.18.21 WillaLifeInsurancePolicyCoverDeathDuetoCOVID-19? DemandforlifeinsurancemaybeontheriseduringthepandemicasmoreCanadiansconsiderbuyingapolicyorreviewingonestheyalreadyhave.Ifyou’rethinkingofapplyingforapolicy,hereareafewthingstokeepinmind. LearnMore 4minsread DaveW. Apr.21.21 HowDoesVapingande-CigarettesAffectLifeInsurance? Manyinsurersmayclassifyvapinginthesamewaytheydosmoking.Ifyousmokeorvape,youcanstillqualifyforalifeinsurancepremium,butinalllikelihood,youwillpayahigherratethansomeonewhodoesnot. LearnMore 4minsread LiamL. Aug.24.20