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Understanding Real Estate Terms: Down Payments and Deposits

Saturday Oct 12th, 2019


Real estate terminology can be confusing, especially for first-time buyers. Many terms are used interchangeably – and sometimes incorrectly. The terms “down payment” and “deposit” are a great example. Although both require savings, they occur at different times in the real estate transaction and serve two different purposes.

A deposit is money that you put down when securing a home to purchase. There is no set amount, but it shows that you are serious about buying the property. You and your realtor will decide on the amount, which is usually based on certain factors, like the local market, the overall purchase price of the home and how soon you are closing. Between one and five percent of the purchase price is common.  

Deposits are made in the form of a certified cheque or a bank draft. Once your offer is accepted, the listing brokerage will hold the deposit in trust. The deposit is then applied against the purchase price of the property when the sale closes. 

Down Payment
Once your offer is accepted and you have paid your deposit, the down payment portion of the real estate transaction is next. A down payment is the amount of money that you put towards the purchase price of a home. This amount is deducted from the purchase price and your mortgage loan will cover the remaining amount. Most buyers will tap into their savings to come up with the largest down payment possible to help off-set their mortgage loan amount. It is not recommended to borrow money for your down payment – it's better to save for it and minimize your debts.

In Canada, the minimum down payment amount depends on the purchase price of your home. If you are purchasing a home with a price of $500,000 or less, a minimum down payment of five percent is required. Homes that range from $500,000 to $999,999 require a minimum down payment of five percent for the first $500,000 of the purchase price and 10 percent for the portion of the purchase price above $500,000. Buying a home for $1 million or more? Expect a minimum down payment of 20 percent of the purchase price.

Having said that, if you have poor credit history or are self-employed, you may be required to put down a larger down payment. It’s best to consult with a mortgage broker prior to starting your home search to learn more about your individual situation.

Final Thoughts
Deposits and down payments are two separate entities when it comes to real estate transactions. A deposit shows you are motivated and serious about the deal, while the down payment is an amount of money that you put towards the purchase of a home.

If you have questions about real estate terminology and need the help of a knowledgeable realtor to guide you through the process, please connect with me, Deborah Clerk, Real Estate Sales Representative and ASA at Keller Williams Realty Solutions, Brokerage, in Mississauga, Ontario. I can provide the sound advice you need to help guide you home.

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