Thanks to falling mortgage rates and the benefits of telecommuting, large numbers of young Canadians have bought homes since the start of the pandemic.
While some are familiar with the process of buying a home, others often ignore the difference between a down payment and a down payment. Both can help you secure a home, but they have different goals and requirements.
Deposit vs down payment
A deposit is the amount of money that you enclose with your offer to purchase the home. If your offer is accepted, the deposit is then paid in advance. A deposit signals the seller that you are serious and acts as a form of security for your offer. When a seller accepts your offer, the deposit you made is kept by the seller’s real estate agent in a trust account. In Ontario, deposits for the purchase of a home provided to the seller’s brokerage are protected by the Ontario Real Estate Council.
A down payment, on the other hand, is the amount of money you have to pay up front of the sale price to complete the deal while the rest of the purchase amount is covered by the mortgage you get. A down payment is usually between 5% and 20% of the final purchase value of the house.
A key difference between down payment and down payment is their purpose of ensuring the seller’s and mortgage lender’s confidence, respectively, in your financial ability to own a home. While a deposit tells the seller that you are committed to buying the property, a down payment informs the bank of your ability to manage mortgage expenses. In other words, a down payment is required to secure a mortgage with the bank, while a deposit is optional.
Risks associated with deposits
One of the most important things to know about a deposit when buying a home is that it is non-refundable. It effectively becomes part of the down payment and is subtracted from the final purchase price of the home.
This means that a buyer could lose their down payment if they decide to forgo the purchase or if they are unable to secure a mortgage. However, by adding a “subject to financing clause” in the purchase and sale contract, a buyer can get their deposit back if their mortgage is not approved by the lender within a specified time.
How much should my deposit and my deposit be?
In Ontario, you don’t have to make a deposit to secure your offer. However, it can be difficult to get the seller to accept your offer without the deposit amount. Often times, the buyer and seller agree on a certain amount for the deposit, usually 5% of the final purchase price of the home.
However, the minimum down payment required to complete the transaction, obtain the mortgage and buy a home may vary depending on the final purchase price. In Canada, homebuyers need a minimum down payment of 5% when buying a home priced at $ 500,000 or less. To buy a home that costs between $ 500,000 and $ 999,999, you must make a 5% down payment on the first $ 500,000 of the purchase price and 10% on the remaining price. However, if you buy a home worth more than $ 1 million, you need to make a 20% down payment.
If you decide to make a down payment of less than 20% of the final purchase price, then you will need to purchase mortgage loan insurance from CMHC. And no matter if you’ve put in 20% or less, you still need to pass the Mortgage Stress Test, which is a tool lenders use to determine if you can handle mortgage payments at the benchmark rate of 5.25% or at the rate. interest rate you’re offered plus 2% – whichever is greater.
Want to learn more about the home buying process? Check out our first-time buyer guide.