Our buyers often tell us that, by far, the most stressful part of buying a house is sorting out all financial documents. As real estate agents, we’re not allowed to give financial advice, and we specifically direct you to our favourite mortgage brokers. But, there is one question we repeatedly answer: what is the difference between a down payment and a deposit?
Your Deposit
A deposit is one of the most important parts of a strong offer. Your deposit lives with your offer as “consideration.” A deposit with your offer shows the seller that you have skin in the game and won’t walk away after the fact. In Toronto, a standard deposit is 5% of your offer price, and it will need to be in certified funds. Let’s say, hypothetically, that you are offering on a home for 1.5 million. On the day you’re making your offer, you will need to go to the bank and get a bank draft for approximately $75,000. Therefore, the first thing you should do when you are a homebuyer is liquidating your money and putting it into a chequing account. If you have cash tied up in investments or even in a bank like tangerine that doesn’t have physical branches, you should move cash into a very accessible chequing account. We will need to include a photo of your bank draft, made to the listing brokerage, with your offer. If the seller accepts your offer, the listing brokerage will deposit your bank draft into their trust account until the day that you close on your house. At this point, your deposit money will be credited towards your downpayment. It is important to know that you must also provide a deposit with a conditional offer. If the seller accepts your conditional offer, your bank draft will still be deposited into the listing brokerages trust account but will be released back to you if the deal does not go through, and all parties have signed a mutual release.
★ Check out these blogs that are great resources for first-time buyers:
- Five Tips for Millennial Home Buyers
- Interview with a First Time Homebuyer
- Buying a House with a Friend? Here’s What You Should Know
- What Home Inspections Don’t Reveal About A Property
Your Down Payment
Your down payment is the money that you put upfront when you buy the property. When you buy your new home, the money from your deposit will go towards the down payment. This is where your mortgage broker must advise you. Basically, a bank will never give you a 100% mortgage on a house that you purchase. They always need to see that you are also putting down equity. The purchase amount on your property will determine the minimum allowable size of your downpayment. You must pay your downpayment to your lawyer in cash on closing (“cash” means something different these days. Very likely, your bank will wire the cash to your lawyer’s trust account. Nevertheless, the money needs to be liquidated and ready to go.
★ For more frequently asked questions check out:
Here’s the main takeaway: As long as you are pre-approved with a mortgage broker and you have approximately 5% of your budget ready to go in a chequing account, you’re good to go. There is no need to get too bogged down in the details until it is time to make your offer. When I work with new buyers, the first step is always to get pre-approved and to have a conversation about deposits and down payments. At whatever stage of buying you’re in, if you’re working with us, we’ve got you covered.
Let us know if you have any questions about this.
As always, stay safe. — Robyn Vander Vennen, The Kim Kehoe Team.
