If you're new to the home mortgage process, it's very easy to get confused by some of the terms that are used. The objective of this short article is to improve any kind of confusion when it comes to the deposit vs a down payment.

What Is A Deposit?

The down payment is the cash included within the purchase of a property as a sign of good faith when you make an offer to buy a home. The down payment helps to bind you to the contract as no one wants to lose their down payment. Normally, you provide a certified cheque or a bank draft that your brokerage or lawyer will hold while the terms of the contract are settled upon. If your deal is accepted, your deposit is held in your Real estate agent's trust account.

If your offer is accepted as well as you agree to purchase the subject property, your deposit is then transferred to the lawyer's trust account and is included in your overall down payment. If you can’t come to an agreement, the deposit is refunded to you. Nonetheless, if you agree to purchase the property and do not complete the purchase, your deposit could be forfeit to the seller in full. Your deposit goes ahead of the down payment however also comprises part of the down payment.

The quantity you put forward as a deposit when negotiating with the seller is always unique to each purchase with no guidelines or set amounts set in stone. Rather, it's ideal to discuss this with your realty expert as your down payment can be a topic of negotiation. A bigger deposit may provide you a much better chance of having your deal approved in a competitive market. It likewise puts a lot more responsibility in your court if something is to go wrong preventing you from finishing the purchase.

What Is A Down Payment?

Your down payment is the first payment you put forth when purchasing a property through ways of a home mortgage. In Canada, the minimum down payment is 5%, as lending institutions can only lend up to 95% of the residential property's value. Safeguarding home mortgage funding with anything less than 20% down is only made possible through home loan default insurance. You can source your down payment from your personal funds, the sale of a residential or commercial property, an RRSP, a gift from a family member, or borrowed funds.

Example Situation

Let’s say the property you would like to buy is worth $400k. You plan to make a 10% down payment which equals $40k. Your initial offer includes a 10k deposit that your realtor holds in their trust account. Once the inspection is complete and your financing is in order you can remove all subjects. Your $10k deposit is now transferred to the lawyer’s trust account where it will be added to the remaining 30k for the down payment.

With your $40k down payment made, as soon as you sign the home mortgage documents as well as cover the legal and closing costs, the lender will then forward the rest of the 90% of the funds in the form of a mortgage registered to your title, and you have actually officially purchased the property!

If you have any questions concerning the difference between the deposit and the down payment or any other home loan terms, please connect Canadian Mortgage Experts anytime, it would be a pleasure to speak with you.