What Is the Difference Between Deposit and Down Payment

Real estate can be a complex industry with a lot of terms and definitions to understand. Almost nothing causes more confusion than the difference between a deposit and a down payment. Is it the same thing, and how much of a deposit do you need for a house? It can be, but it can also be different. The haziness is all thanks to the tiered percentage governing insured mortgages.

In this post, we’ll clear up everything you need to know about down payments vs deposit in real estate.

Do you have questions about the home buying process? The best way to move forward is with personalized guidance. Book your complimentary Buyer’s Consultation right here.

Deposit Vs Down Payment

The down payment is the total portion of your home purchase that you pay out of your own funds. The minimum requirement is tiered based on the purchase price as follows:

5% for all properties priced at $500,000 or less.
For more expensive homes, you need 5% on the first $500,000 plus 10% on the amount from $500,000 to $1.5 million.
If a home costs $1.5 million or more, you need a 20% down payment on the full amount. CHMC mortgage insurance is not available or required beyond this price point.

Imagine buying a house for $800,000. The down payment works out to $55,000 (5% of the first $500,000 is $25,000, plus 10% on the remaining $300,000 for an additional $30,000). That is your total share of the purchase while your mortgage covers the rest.

Are you in the beginning stages of buying your next home? The posts below will give you an idea on what to expect:

Confusion over the deposit and down payment happens for three reasons:

The deposit counts toward the down payment, but may or may not be the full down payment. It depends on the purchase price. The deposit is the portion that you pay within 24 hours of a seller accepting your offer. The amount is negotiable, but 5% is standard.

Unlike the down payment, the deposit percentage is not tiered. It is calculated based on the full purchase price. Thus, a 5% deposit on a home priced at $800,000 is $40,000.

Depending on the purchase price, the deposit on a house offer can be the entire down payment. For example, if you buy a $500,000 condo, your down payment and deposit are virtually the same.

Who gets the down payment on a house?

Since a buyer is placing a deposit in good faith, who gets it and when are fair questions. Ultimately, all funds will eventually go to the seller. In the meantime, the portion of the down payment that you make upfront (the deposit) gets held in trust with the listing brokerage.

The Myth of the 20% Down Payment Requirement

Many people, especially first-time home buyers, mistakenly believe that a 20% down payment is always required to buy a house. This misconception is why some people delay getting into the market longer than necessary. Once again, there are a few reasons for the confusion.

20% is required for homes worth $1.5 million or more. While Toronto and Etobicoke real estate prices are notoriously high, there are still many options for buyers with lower budgets.
A 20% down payment will save you from having to get mortgage insurance, which will reduce the overall cost of your home over time. In addition, you will pay less interest by covering a greater portion of the purchase price.

The benefits of placing a higher down payment and deposit whenever possible are undeniable. However, no one should let it discourage them from getting into their first home as soon as they are ready.

Today’s Etobicoke real estate market can be especially daunting for seniors. If buying, selling, or downsizing is on your mind, the posts below can help:

What Happens to the Deposit When Buying a House?

Now that you know the major differences between a deposit and down payment, let’s review the process in more detail. Before placing offers, you should have your deposit quickly accessible and ready to go.

In Ontario, the standard contract gives buyers two choices: you can pay your deposit when you present your offer to the seller or you can agree to pay within 24 hours of the seller accepting your offer. Buyers usually prefer the second option, which is standard. However, if you’re in competition, placing a deposit with your offer can be more compelling to the seller.

Sellers will often view a higher deposit as a stronger offer. It may sway them to accept your offer over one with a lower deposit. This can mean getting the house you want without having to pay more for it.

If you decide not to close on your home after signing a binding contract, you could lose your deposit. (You also stand to lose far more than your deposit, so be careful!)

When your transaction closes, the rest of your down payment (if applicable) is due, which gets added to the deposit. All funds are then released to the seller. Your lawyer will take care of the details. Your job is to start packing and get ready to love your new home and neighbourhood!

Whether you are ready to buy now or just have a few questions, our Etobicoke real estate agents are here for anything you need. Reach out today at 647-282-7653 or email contact@sileckythompson.com with any questions or to get started.