Deposit vs Down Payment: What’s the Difference?
We often get questions about the difference between a deposit and a down payment. They’re both money that is given throughout the real estate process, but they are given at different times and for different purposes. This blog explains a deposit vs down payment to help make the purchasing process clear to you.
What is a deposit?
A deposit is a form of security for the seller that holds the buyer accountable for completing on the agreement of purchase and sale once the deal goes firm. A typical deposit in the Greater Vancouver resale market is 5% of the purchase price. Depending on the way the contract is worded, a deposit is usually due within 24 hours of subject removal. If subjects do not remove, then the deposit is not due.
For more information on subject removal and deposits, check out our blog here: Subject Removal 101
In the case that a buyer removes subjects, and hands in the deposit but refuses to complete on the purchase then the seller may get to keep the deposit and the buyer would forego it.
The deposit forms a part of the down payment, and is typically held in trust by the buyer’s agents brokerage until completion.
What is a down payment?
The down payment is the amount paid at the time of completion. It is the amount that the buyer pays upfront while the rest of the purchase price is funded by a mortgage lent by a bank to be repaid over a period of time. If a real estate purchases completes as planned, the deposit is then credited towards the purchase price and forms a part of the down payment. Therefore, is it a part of the down payment, but they are not the same thing and are paid at different times.
While the standard amount for the deposit is 5%, a down payment can range between 5% to 20% or more of the total value of the property. There are different down payment requirements based on certain circumstances; however, in BC, the generic minimum down payment rules are as follows:
5% on properties priced below $500,000
10% on properties between $500,000-$1,000,000
20% on properties $1,000,000 and above
If you are purchasing an investment property, most banks will require a minimum of 20% down payment regardless of the purchase price.
When do I have to pay a deposit vs down payment?
Typically, the deposit is due within 24 hours of subject removal. The remaining down payment is not due until completion.
Who do I pay the deposit to?
Typically the deposit will be held in trust by the buyer’s agents brokerage. If the property is sold without buyer representation, the deposit should be paid to an appointed solicitor in trust.
DO NOT pay a deposit directly to the seller when buying a home, as there is always the chance that the seller will not return the deposit or that they are not the real owner and perpetrating a fraud.
In a real estate transaction, always make sure that you have the proper representation and have hired both a realtor and a lawyer to represent you to ensure that the deposits are handled in a professional and proper manner.
EXAMPLES OF DEPOSIT VS DOWN PAYMENT
The buyers are buying a property with a purchase price of $500,000. They will be putting a 10 per cent down payment ($50,000). They remove subjects and the offer becomes a firm offer on January 27 and they will be closing on March 4. They immediately pay a deposit of $25,000 to secure the property. The buyers will need to pay the balance of the down payment on the closing date, another $25,000, for a total down payment of $50,000.
The buyers are buying a property that is under construction and the developer is asking for a 10 per cent deposit. The property that they are purchasing is $619,900 plus GST. They have given a deposit of $61,990. The final purchase price with GST is $650,895. However, the buyers are only putting down a down payment of 5 per cent ($32,544.75). Therefore, the buyers will get back the difference on closing.
Now that you have a rough idea of the difference between a deposit vs down payment, it’s important that you keep learning everything about the real estate process from an experienced professional. If you’re just starting out in your home purchasing journey, then give us a call at 604-765-0376. Prefer text? 604-319-0200 or email email@example.com to start a conversation. We’re here to help.
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