I’m thinking about buying a house this year. What’s the difference between a deposit and a down payment? How much will each one cost me?

Much like the words “client” and “customer,” “deposit” and “down payment” are sometimes used interchangeably by the general public — but they have different meanings. Deposits come before down payments, so let’s start there.

A deposit is the money you submit during the offer process to secure a property you wish to purchase. Think of it as a gesture of good faith to the seller. A deposit shows the seller you’re serious and committed to buying their property. It demonstrates that you have the financial means to make the purchase and you’re comfortable taking on some level of risk until the deal closes.

There is no standard amount for a deposit, so I can’t say how much it will cost you. It’s an issue your real estate representative can negotiate with the seller’s rep, along with the timing of any payments. Deposits can be due when an offer is made, once an offer is accepted, or another agreed-upon time. This should all be captured in the written terms of your offer and the eventual agreement.

If the seller accepts your offer, the deposit will be placed in a trust account until it becomes payable. This is usually with the seller’s brokerage, but the buyer and seller might agree to another approach. Consumer deposits are protected under the deposit insurance program managed by the Real Estate Council of Ontario (RECO). The program exists to protect you in case the brokerage is lost due to fraud, misappropriation, insolvency or bankruptcy. This coverage doesn’t apply to deposits given to, or held by, individuals or companies not registered with RECO. That’s something to consider if you’re ever asked to pay a deposit directly to a seller.

Once the deal closes, your deposit will be applied towards the home’s total purchase price. The down payment is usually a combination of your deposit, and any other funds you will personally pay, while the rest of the purchase price is typically covered by mortgage financing — assuming you aren’t paying cash for the home.

To be clear, the deposit is the money you pay up front to secure, or commit to, an agreement of purchase and sale for a property. The down payment is the money that you pay to the seller to be eligible for financing. Down payment requirements can vary, and the Government of Canada has established some important guidelines on the subject.

I would encourage you to visit the Canada Mortgage and Housing Corporation website (cmhc-schl.gc.ca), the Genworth website (genworth.ca), or talk to your personal banker or mortgage broker for more information, as the rules around mortgage eligibility have recently changed.

Buying real estate is a serious commitment. A buyer who pays a deposit and then attempts to walk away from a deal may lose the deposit and possibly face a lawsuit for any damages suffered by the seller. And in most cases, deposits are not refundable.

The difference between a deposit and a down payment is pretty straightforward. But there are many more real estate terms you should understand when you buy a house. That’s why I strongly recommend working — as a client — with a real estate salesperson who can help you navigate the murky waters and answer any questions you may have. I also strongly recommend that you also use the services of a lawyer who is qualified to handle real estate transactions.


Joseph Richer is Registrar of the Real Estate Council of Ontario (RECO). He is in charge of the administration and enforcement of all rules that govern real estate professionals in Ontario. You can find more tips at reco.on.ca, follow on Twitter @RECOhelps or on YouTube at http://www.youtube.com/RECOhelps.

 

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