What is the Difference Between the Deposit vs Down Payment?
Mortgage terminology can be confusing, regardless of whether you are a first time home buyer or a re-occuring home buyer! However, there are some key differences between the deposit and down payment that are monumental; mostly, how much they are and when they are paid.
DEFINITION – Deposit vs Down Payment
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.
Depending on the way the contract is worded, a deposit is usually due either upon or within 24 hours of subject removal. If subjects do not remove, then the deposit is not due.
The deposit ensures that the buyer is committing to the purchase in good faith, and that they have the intention of closing the deal upon removing subjects. The only way that a buyer would lose their deposit is if they DO remove subjects and hand in the deposit, but later refuse to complete on the purchase. In that situation, the seller may get to keep the deposit and the buyer would forego it.
A deposit is held by a third party (often the buyer’s agent’s brokerage) in trust, until the completion date when it forms a part of the down payment.
DOWN PAYMENT: A down payment is the TOTAL amount of funds that the buyer puts forward themselves to go towards purchasing a property. This may be in the form of cash savings, or other savings like funds held in a Registered Retirement Saving’s Plan (RRSP) and taken out as part of the Home Buyer’s Plan.
The down payment will make up the difference between what the purchase price is and the mortgage loan amount. It is essentially what that the buyer pays towards a home (not factoring in closing costs) to complete on a property purchase.
Because the down payment is the amount paid by the buyer up to the value of the mortgage, it can be calculated as:
Purchase Price – Value of Mortgage = Total Down Payment
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.
AMOUNT – Deposit vs Down Payment
DEPOSIT: A typical deposit in the Greater Vancouver resale market is 5% of the purchase price.
The amount of the deposit is not fixed, and can be higher or lower depending on the location market conditions. It is typically a percentage basis, so the amount depends on the value of the property.
In a market like Vancouver, a seller will typically expect at least a 5% deposit when reviewing offers and may expect more depending on if the property is in a multiple offer scenario.
DOWN PAYMENT: Similar to the deposit, the down payment is not a fixed amount and depends on the lender rules and value of the property. There is a minimum down payment requirement in British Columbia that does govern what the lowest amount of down payment you can put towards a property purchase is.
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.
With relation to the deposit, you can view the down payment as the following calculation:
Purchase Price – Mortgage – Deposit = Remaining Down Payment Funds Due at Completion
DUE DATE – Deposit vs Down Payment
DEPOSIT: Typically, the deposit is due either upon or within 24 hours of subject removal. (given you choose to proceed with the purchase and remove subjects) Therefore, the deposit is paid BEFORE the down payment, as it is there as a commitment to complete the deal.
For more information on subject removal and deposits, check out our blog here: Subject Removal 101
DOWN PAYMENT: The remaining down payment is not due until the agreed upon completion date.
The deposit forms a part of the down payment. Because you will have already paid the deposit at the time you removed subjects, in the simplest terms, you can refer to this calculation for the deposit and down payment connection:
Deposit (due within 24 hours of subject removal) + Remaining Down Payment (due at completion) + Mortgage (done at completion) = Purchase Price
Remember: Deposit before down payment!
WHO IS IT PAID TO – Deposit vs Down Payment
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.
DEPOSIT: If the property is a resale property (sold from a seller, and not a developer) then 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.
If the property is a presale/new build (sold from the developer) then it is very common for the deposit to be made out to the developer’s solicitor in trust, or to the developer’s sales/marketing staff’s brokerage in trust. It is key to review the presale contract and make sure that you are aware how each deposit should be made out, and exactly who it should be made out to.
DOWN PAYMENT: The remaining funds for the down payment are given directly to the buyer’s notary/lawyer, and typically given by the buyer to their legal representative by form of bank draft.
It is important to check with your legal professional in advance as to how much funds will be required to close (down payment & closing costs included), and how they would like that payment to be received. For more information on closing costs, check out this blog: Closing Costs 101
EXAMPLES OF DEPOSIT VS DOWN PAYMENT
Example 1 – $500,000 purchase with 10% down
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.
Deposit: They immediately pay a deposit of $25,000 to secure the property. (5%)
Down Payment: 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. (remainder of 10% down)
Example 2 – Deposit equals the Down Payment
The buyers are buying a property that is under construction and the developer is asking for a 10% deposit. The property that they are purchasing is $619,900 plus GST. The final purchase price with GST is $650,895.
Deposit: They have given a deposit of $61,990. (10%)
Down payment: The buyers have decided they will only put 10% down. In this case, the deposit amount given equals the total down payment.
Example 3 – $750,000 purchase with 20% down payment
The buyers are purchasing a property that costs $750,000. They have decided they will put 20% down which is $150,000. They remove subjects and the deal completes in 2 weeks, the deposit amount they negotiated with the seller is 7%.
Deposit: They hand in their deposit of $52,500 (7% agreed upon).
Down Payment: At completion, they need to pay the remaining 13% of their down payment, which equates to $97,500. The buyers have now come up with 20% down payment between their initial deposit and remaining cash funds.
Understanding the real estate process and how much you need to pay can be confusing, but that’s exactly why we’re here – to help guide you! If you’re thinking about buying a home and want to get a crystal clear understanding of the process, then give us a call at 604-765-0376. Prefer text? 604-319-0200 or email [email protected] to start a conversation. We’re here to help.