There is a lot of terminology and jargon involved in the process of buying and selling a home. It can be confusing; overwhelming, even. A question I’m frequently asked is, “What’s the difference between deposit and down payment?”
The difference between deposit and down payment
In Canada, the most common way to buy real estate is with a mortgage. A mortgage isn’t a simple loan; it’s an investment by the lender secured by the tangible asset of your properly. No-money-down and zero-down-payment loans are against Canada’s mortgage lending rules. To qualify for a mortgage, you must “put down” money up front. Depending on your situation and qualifications, this can be as little as 5%.
When you make an offer to buy a home, it is often conditional. Once conditions or subjects are removed (or, if there are none), you make a “deposit.” A deposit is, in essence, part of your down payment.
Although 5% is a typical deposit in our local Greater Vancouver real estate market, it does vary.
If you don’t have access to a 5% deposit (say, because the money is tied up in RRSPs), the deposit could be negotiated. Although it’s not uncommon to see deposits of less than 5%, deposits of less than $5,000 are rare.
If your purchase has a long closing date (say, because it’s a new build), a larger deposit is often required. Developers typically require a 20% deposit (paid in intervals until the completion of the build).
If your purchase requires a large deposit that you don’t have (say, because you’re a first time buyer intending to purchase a new development), you may have to arrange to borrow the 20% and, at close, have the “excess” amount paid back.
If you don’t require a typical mortgage (say, due to a large available line of credit), the rules don’t apply.
Normally, a deposit is paid into a trust with the buyer’s realtor’s office. It is later settled as a portion of the down payment when the lawyer or notary processes the closing and title transfer.
Do you have any questions about complicated real estate jargon? Let us know!