The Difference Between a Deposit and Down Payment

The Difference Between a Deposit and Down Payment with Key Momentum Mortgages

Do you know the difference between a deposit and down payment? Are you new to the home buying process and feeling confused by some of the terms used? We understand that it can be overwhelming, but don't worry, we're here to help. In this article, we'll clarify the difference between two commonly confused terms: the deposit and downpayment.

What Is A Deposit?

Firstly, let's define the deposit. This is the money included with a purchase contract as a sign of good faith when you offer to purchase a property.

It's essentially the "consideration" that helps make up the contract and binds you to the agreement. When you make an offer, you typically include a certified cheque or a bank draft that your real estate brokerage holds while negotiations are finalized. If your offer is accepted, your deposit is held in your Realtor's trust account. If you're unable to reach an agreement, your deposit will be refunded to you. However, if you commit to buying the property and don't complete the transaction, your deposit could be forfeit to the seller.

It's important to note that while the deposit goes ahead of the downpayment, it actually makes up part of the downpayment. The amount you put forward as a deposit when negotiating the terms of a purchase contract is arbitrary, meaning there is no predefined or standard amount. Instead, it's best to discuss this with your real estate professional as your deposit can be a negotiating factor in and of itself. A larger deposit may give you a better chance of having your offer accepted in a competitive situation. However, it also puts you on the hook for more if something changes down the line and you cannot complete the purchase.

What Is A Down Payment?

Moving on to the downpayment, this refers to the initial payment you make when buying a property through mortgage financing.

In Canada, the minimum downpayment amount is 5%, as lenders can only lend up to 95% of the property's value. Securing mortgage financing with anything less than 20% down is only made possible through mortgage default insurance. You can source your downpayment from your resources, the sale of a property, an RRSP, a gift from a family member, or borrowed funds.

Let's use an example scenario to illustrate the difference between the deposit and the downpayment. Say you're looking to purchase a property worth $400k and plan to make a downpayment of 10% or $40k. When you make the initial offer to buy the property, you put forward $10k as a deposit that your real estate brokerage holds in their trust account. If everything checks out with the home inspection and you're satisfied with financing, you can remove all conditions. Your $10k deposit is transferred to the lawyer's trust account, where it will be added to the remaining $30k for the downpayment.

With your $40k downpayment made, once you sign the mortgage documents and cover the legal and closing costs, the lender will forward the remaining 90% in the form of a mortgage registered to your title, and you have officially purchased the property!

Understanding the difference between a deposit and down payment may seem simple, but it's important to know. If you have any questions about these terms or any other mortgage terms, please don't hesitate to connect with us at Key Momentum Mortgages Ltd. Simply use the contact information below or visit our Connect page and we'll get back to you right away.

We'd love to work with you and make your home buying experience as smooth as possible.

Laura Mackie | Key Momentum Mortgages Ltd. Langley Mortgage Broker
Laura Mackie | Key Momentum Mortgages Ltd. Langley Mortgage Broker

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Laura Mackie, AMP | Mortgage Broker
Key Momentum Mortgages Ltd.

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