Info for Buyers: Know the difference between a Down Payment and Deposit

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If you’re in the market to buy a condo in East Van, there are a few things you need to do to be prepared to offer on a property – ensuring you’re financially ready is one of the most important. Not only do you need a down payment to put towards the price of the property, but you’ll need to have a portion of that down payment liquid and ready as your deposit on the property. The difference between a down payment and a deposit is small, but it’s important.

What is a Down Payment?

The down payment on a property is the amount of money you’re putting towards the cost of a property. The minimum down payment needed on a home in Canada is 5% (which means you are borrowing money for the remaining 95% of the purchase price, in the form of your mortgage). However, if the price of the property is $1-million or more, you need to have at least 20% down. A down payment of less than 20% down means you need to pay mortgage insurance, which is a small insurance premium added to the cost of the mortgage.

Your down payment can come from your own savings or as a gift from relatives, and is a factor in how large of a mortgage you can be approved for.

The actual down payment funds aren’t need until a few days before the property officially becomes yours. At that time, you will need to give the down payment funds to the lawyer completing the sale (they pass the funds on to the Seller’s lawyer). However, you will likely need to provide proof of your down payment when you’re getting mortgage approval.

What is a Deposit?

Every offer for a home (whether a pre-sale or a standard purchase) requires a deposit of “good faith” money indicating that you have interest in buying the property that also gives the home Sellers some insurance if the Buyer doesn’t complete the sale. The deposit amount is typically 5% of the purchase price, but it can be slightly more or less.

When you offer on a property, the contract will stipulate the amount of the deposit, along with when this deposit is due. Typically, deposits are due when the offer to purchase is official (when the contract becomes “firm”), which is after the Buyers due diligence (home inspection, etc). The Buyer must then give the deposit amount to their Realtor. The Realtor’s office holds onto these deposit funds until they are passed onto the lawyer. Thus, the deposit amount becomes a part of your down payment. Keep in mind, if you are buying a property with a 5% down payment, your deposit would be the entire down payment amount.

One of the most important details of the deposit is that the funds need to be liquid if you will be putting in offers to buy properties. You will need to give your Realtor the deposit in the form of a bank draft, which means the money is removed from your account when you take out the bank draft. Keep in mind that you are on a timeline when you have an accepted offer on a property, so you need to do your due diligence and come up with your deposit before a certain date and time, otherwise the contract terminates. If your deposit funds are sitting in a different account of yours, or perhaps are sitting in some investment portfolios, it may take a few days for the bank to transfer the funds to an account where they can be removed. You don’t want this timeline to ruin your chances of officially buying a property! If your parents are paying the deposit on your behalf, you’ll want to make sure that they can take the money out of their account, and that they’ll be in town to do so when you need it!

Down payments and deposits on only one factor of what you need to do to be prepared to buy a property. Contact us to sit down and discuss everything you need to know about a home purchase before you start searching.