Deposit VS Down Payment

Purchasing a home is one of the most significant financial decisions people make. Therefore, it’s essential to understand the terminology used in the home-buying process, including the difference between a deposit and a down payment. These terms are often used interchangeably in Canada but have distinct meanings.

A deposit is a sum of money paid to show commitment to the purchase, while a down payment is the portion of the purchase price paid upfront to secure the mortgage. In most cases, the deposit is applied toward the down payment.

A buyer pays a deposit when they offer to purchase a home. Usually, upon offer acceptance or subject removal, depending on the local market. The seller’s real estate brokerage or lawyer typically holds this money in trust until the transaction closes. Buyer and seller negotiate the deposit amount during the offer process, and it’s usually around 5% of the purchase price in larger markets or a flat fee in smaller ones.

The deposit is applied toward the purchase price when the sale goes through. However, if the deal falls through because of a condition not being met the deposit is returned to the buyer.

A down payment is a portion of the purchase price a buyer pays in cash when they get a mortgage. The minimum down payment in most cases is 5% of the purchase price for homes under $1 million and 10% for homes over $1 million. For homes over $1 million, the portion of the purchase price above $1 million requires a 20% down payment. The mortgage covers the rest.

In conclusion, understanding the difference between a deposit and a down payment is crucial when purchasing a home in Canada. By understanding these terms, homebuyers can navigate the home-buying process more confidently and clearly.