Houses for Sale in Ontario: Putting Down a Deposit Vs. a Down Payment

Buying a house is an exciting time! Whether you’re a first-time home buyer or an experienced one, the process is never dull. During the time in which you plan to buy your home, you’ll likely hear the two words: deposit and down payment. While they sound fairly similar, and are sometimes used interchangeably, they mean very different things in the real estate world. However, it can be tricky to get your head around the differences. To help you better understand the contrast between these terms, we wrote all about them! This way, you have a better idea of the parts in your transaction when buying homes for sale in Ontario. Follow along below to learn more. 

What’s a Deposit? What’s a Down Payment?

• Deposit

A deposit is a payment that is intended to signal to the seller that you are a serious buyer. In general, most deposits range from one to five percent of the purchase price. This payment is made at the same time that you make an offer and goes towards the purchase price of the home. However, the payment is only paid to the seller after they have accepted your offer. 

The deposit provides the seller with a concrete reason to remove their home from the market while the deal is finalized. It’s important to note that if the seller accepts your offer and you decide to back out of the deal last minute, you could forfeit your deposit. This is because the seller may have missed out on possible offers. Although, there are a few instances in which you can get your deposit back. Talk with your agent to learn about what these conditions are. 

• Down Payment

A down payment is the amount of money that you put towards the purchase of your house. This payment is paid at closing. In Canada, down payments typically range from 5% of the purchase price (the minimum) and 20% of the purchase price (the target amount). If your down payment is less than 20%, then you will need to buy mortgage loan insurance. After you’ve paid your down payment, your mortgage will cover the remaining cost of the house. For those who are self-employed or have a poor credit history, a larger down payment may be necessary in order to secure a loan. 

Differences Between Deposits and Down Payments When Buying Homes for Sale in Ontario

• Timing

One of the biggest differences between a down payment and a deposit is the time at which they are paid/due. When you make a deposit, it’s paid at the time that your agent puts in an offer on a home on your behalf. However, the deposit is not received by the seller until they accept your offer. During that time, the deposit is held in trust by the seller’s brokerage. This is similar to an escrow account in that funds are held until which point they can be transferred to the right person. 

As we mentioned above, deposits generally cannot be taken back if the sale of the home doesn’t close. Unless there are specific clauses in the offer agreement, the seller isn’t legally obligated to pay back your deposit. With this in mind, some circumstances you could be able to get your deposit back might include: failure to receive home financing, a home inspection that reveals critical defects, or inability to sell your current home before buying a new one. 

Unlike a home deposit, a down payment is paid at the time of closing. On your closing day, the funds for your down payment will be paid from the trust account to the seller. 

• Amount

Another key difference between deposits and down payments is the amount that you pay. With a deposit, the amount usually ranges from one to five percent of the purchase price. In more competitive markets buyers will usually need to fork out five percent. However, in other markets, a deposit of one percent will be sufficient. 

Contrastively, a down payment can cost anywhere from 5 percent of the purchase price to 20 percent or greater. Although, as we stated above, down payments of less than 20 percent are required to buy mortgage insurance.