When it comes to buying a home in Canada, there are a few terms that you’ll come across that may seem similar but are actually quite different. One such pair of terms is “house deposit” and “down payment.” While they may seem interchangeable, they are actually two distinct steps in the home-buying process. Understanding the difference between a house deposit and down payment can help you make a more informed decision when purchasing a home in Canada.
Deposits and Downpayment
First, let’s define what each term means
Putting a deposit on an accepted offer
A house deposit is a sum of money that you put down when you make an offer to purchase a home. It is typically a small percentage of the purchase price and is intended to show the seller that you are serious about buying the property. The house deposit is usually held in trust by the seller’s real estate agent or lawyer until the sale is finalized.
What is a Downpayment?
A down payment, on the other hand, is the portion of the purchase price that you pay upfront when you take out a mortgage. It is a much larger sum of money than the house deposit and is typically a minimum of 5% of the purchase price (though it can be higher depending on the lender and the type of mortgage you choose). The down payment is used to reduce the amount of the mortgage and can also help you qualify for a lower interest rate.
So, to summarize, a house deposit is a small sum of money that you put down when you make an offer to purchase a home, while a down payment is a larger sum of money that you pay upfront when you take out a mortgage.
What’s the difference between a deposit and a downpayment?
Now that we’ve defined these two terms, let’s take a look at the difference between them in more detail:
- Purpose: The primary purpose of a house deposit is to show the seller that you are serious about purchasing the property. A down payment, on the other hand, is used to reduce the amount of the mortgage and can also help you qualify for a lower interest rate.
- Size: A house deposit is typically a small percentage of the purchase price, while a down payment is a larger sum of money (usually at least 5% of the purchase price).
- Timing: A house deposit is typically paid when you make an offer to purchase a home, while a down payment is paid when you take out a mortgage (which usually happens after your offer has been accepted).
- Refundability: If your offer to purchase a home is not accepted, you may be able to get your house deposit back. However, if your offer is accepted but you later decide not to proceed with the purchase, you may not be able to get your house deposit back (depending on the terms of the offer). A down payment, on the other hand, is not refundable once it has been paid.
Tip: It’s also a good idea to know what to expect for closing costs. Check out our blog article here where we detail what you can expect to pay when closing a home
How much do I have to put down for a deposit?
The amount of money that you will need to put down as a deposit when making an offer to purchase a home in Canada will depend on a few factors, including the purchase price of the property, the terms of the offer, and the seller’s expectations.
Typically, a house deposit is a small percentage of the purchase price of the property. In some cases, the seller may request a deposit of as little as 1% of the purchase price, while in other cases the seller may request a higher percentage (such as 5% or 10%). The specific amount of the deposit will be negotiated between the buyer and the seller (or their respective agents) as part of the offer process.
It’s important to note that the house deposit is typically held in trust by the seller’s real estate agent or lawyer until the sale is finalized. If the offer is accepted and the sale goes through, the house deposit will be applied towards the purchase price of the property. If the offer is not accepted, the buyer may be able to get their house deposit back, depending on the terms of the offer.
Keep in mind that in addition to the house deposit, you will also need to pay a down payment when you take out a mortgage to finance the purchase of the property. The down payment is a larger sum of money (usually at least 5% of the purchase price) that is used to reduce the amount of the mortgage and can also help you qualify for a lower interest rate.
If I haven’t put a deposit can I walk away from an accepted offer?
If you have an accepted purchase agreement for a home but have not yet put down a deposit, you may be able to get out of the purchase depending on the terms of the agreement and the specific circumstances of your situation.
In general, a purchase agreement is a legally binding contract that outlines the terms and conditions of a real estate transaction. Once both parties have signed the agreement and it has become legally binding, it can be difficult to get out of the purchase without incurring some kind of penalty or consequence.
That being said, there may be certain provisions in the purchase agreement that allow you to terminate the agreement under certain circumstances. For example, the agreement may include a “subject to financing” clause, which allows you to cancel the agreement if you are unable to obtain a mortgage to finance the purchase. Other provisions may allow you to cancel the agreement if you are unable to complete the necessary inspections or if there are issues with the property that are not disclosed in the agreement.
It’s important to carefully review the terms of your purchase agreement and consult with a real estate lawyer or other legal professional if you are unsure about your rights and obligations under the agreement. They can advise you on the best course of action based on your specific situation.
There are a few different ways that you can pay a house deposit when making an offer to purchase a home in Canada. The specific method that you choose will depend on the terms of the offer and the preferences of the seller (or their agent). Here are a few common options:
- Certified cheque or bank draft: One option is to provide a certified cheque or bank draft made out to the seller (or their agent) as the house deposit. This is a secure way to pay the deposit, as the funds are guaranteed and cannot be drawn upon until the cheque or draft is presented for payment.
- Wire transfer: Another option is to wire the funds directly from your bank account to the seller (or their agent). This can be a fast and convenient way to pay the deposit, but it may involve additional fees.
- Personal cheque: In some cases, the seller (or their agent) may be willing to accept a personal cheque as the house deposit. This option is less secure than a certified cheque or bank draft, as the funds may not be immediately available and there is a risk that the cheque could bounce.
- Cash: It is generally not recommended to pay a house deposit in cash, as it can be difficult to track and may not be as secure as other payment methods.
It’s important to keep in mind that the house deposit is typically held in trust by the seller’s real estate agent or lawyer until the sale is finalized. If the offer is accepted and the sale goes through, the house deposit will be applied towards the purchase price of the property. If the offer is not accepted, the buyer may be able to get their house deposit back, depending on the terms of the offer.
What happens if I don’t close on the home?
If you do not close on a home that you have agreed to purchase, you may face consequences depending on the specific circumstances of your situation.
In general, once you have signed a purchase agreement for a home and the agreement has become legally binding, you are obligated to complete the purchase according to the terms of the agreement. If you do not close on the home, you may be in breach of the contract and may be required to pay damages to the seller.
The specific consequences of not closing on a home will depend on the terms of the purchase agreement and the laws of the jurisdiction in which the property is located.
What are the potential consequences if I don’t close?
The specific consequences of not closing on a home will depend on the terms of the purchase agreement and the laws of the jurisdiction in which the property is located. Some common potential consequences include:
- Forfeiture of the house deposit: If you do not close on the home, you may be required to forfeit the house deposit that you paid as part of the purchase agreement. This deposit is typically a small percentage of the purchase price and is intended to show the seller that you are serious about buying the property.
- Legal action: If you do not close on the home and the seller suffers damages as a result, they may choose to take legal action against you to recover those damages. This could involve suing you for breach of contract and seeking compensation for any losses that they incurred as a result of your failure to complete the purchase.
- Damage to your credit: If you do not close on the home and the seller takes legal action against you, this may have a negative impact on your credit score.
It’s important to carefully review the terms of your purchase agreement and consult with a real estate lawyer or other legal professional if you are unsure about your rights and obligations under the agreement. They can advise you on the best course of action based on your specific situation.
In conclusion, it’s important to understand the difference between a house deposit and down payment when buying a home in Canada. While they may seem similar, they serve different purposes and have different implications for your home-buying journey. By understanding these terms, you can make a more informed decision and be better prepared for the home-buying process.
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