One of the biggest details Buyers need to prepare for before truly starting their search is their financing, and how much cash they’ll have towards the purchase, specifically for your down payment and deposit (with funds for property transfer tax and renovations close behind).
I have a lot of clients who are confused about the difference between a down payment and deposit, so I wanted to go through the details here.
What is a Down Payment?
Your down payment is the amount of cash you’re putting towards to the price of the property. Your mortgage approval is based on, among other things, the amount of down payment you have. There are specific requirements in Canada for the amount of down payment needed depending on the type and price of the property. 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 full down payments funds aren’t needed until just before the Completion Date (which is the day the your purchase funds are sent to the Seller and the title of the property is transferred to you) however you’ll need to provide a portion of your down payment during the offer process as a “good faith” deposit.
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. This deposit forms part of your down payment.
The deposit amount is typically around 5% of the purchase price and is typically due once the Offer to Purchase is a firm contract (i.e. when the Buyer submits a subject free offer, or when the Buyer removes the conditions on their offer), though the deposit may be due upon Offer submission. The deposit amount and deadline to submit will be specified in your Offer.
Keep in mind, if you are buying a property with a 5% down payment, your deposit would be the entire down payment amount.
When a Buyer submits their deposit, their Realtor submits the deposit to their office where it remains in the Brokerage bank account. A few days before the Completion Date, these funds are sent to the Buyer’s Lawyer to package the amount with the rest of their down payment and mortgage funds.
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 a family member is paying your deposit, it would be beneficial to have them forward the deposit funds to you ahead of time so you have the funds sitting in your savings account and ready to be pulled when needed. If you bank with Tangerine you need to be aware that deposits cannot be pulled at a brick and mortar location so you need to order the deposit ahead of time and have it delivered to you. It can take a few days for the deposit to be delivered so ensure you understand the timeline before you offer.
For more information about your down payment and important information you should know, talk to your mortgage broker. For more information about the deposit process, talk to your real estate agent.