Down Payments & Deposits…Which is Which?

Down Payments & Deposits...Which is Which?

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Written by: Erin Best of REW When the time comes to make an offer on a property, two terms are often used interchangeably in the purchase process: deposit and down payment. While they both involve money changing hands, they serve different purposes. Understanding the differences between these terms is important. The Deposit A deposit is the sum of money provided by the buyer upon making an offer on a property. This deposit demonstrates the buyer's commitment to the purchase and serves as a show of good faith. Typically, the deposit is held in the buyer’s real estate agent’s brokerage trust account, or whichever trust account the buyer and seller agree to in the terms of an offer. Your deposit money should be readily available in an accessible account prior to you viewing properties. Having a deposit accompany your offer or as part of your offer, cements your offer's credibility as a serious contender. Your deposit can accompany your offer as guaranteed funds, and it’s usually in the form as a cashier’s cheque. Best practice from BC Financial Services Authority? Steer clear of making your certified cheque out to cash. Why? Well, imagine the unfortunate scenario where that cheque goes missing or falls into the wrong hands. Not only could this pose a security risk, but it could also lead to additional fees imposed by financial institutions to cancel the cheque and reissue a new one. This process can be anything but seamless, often entailing unnecessary hassle and precious time wasted. So, do yourself a favour and ensure your certified cheque is made out to the intended recipient, safeguarding both your funds and your peace of mind throughout the transaction journey. One primary function of the deposit is to protect the seller in case the buyer defaults on the contract. If the buyer fails to fulfill their obligations outlined in the purchase agreement, such as backing out of the deal without valid reasons, the seller may be entitled to keep the deposit as compensation for the time and effort lost during the transaction process. Moreover, deposits can act as a deterrent against frivolous offers. When buyers submit an offer accompanied by a substantial deposit, it signals to the seller that they are serious about the purchase, which can strengthen the offer's credibility. Down Payments On the other hand, a down payment refers to the initial payment made by the buyer toward the total purchase price of the property. Unlike the deposit, which is primarily a gesture of good faith, the down payment constitutes a significant portion of the total amount due and is often a requirement by lenders for financing approval. It offsets the total principal loan amount and reduces your monthly payments. Your down payment must be available when you meet with your lawyer or notary to sign the purchase documents with them. There are a few ways that your down payment becomes available to you for closing:  
  • If you had a home to sell prior to buying your new home, then the equity you built up during that period becomes your down payment. Now, if you haven’t closed on that sale yet and you need to close on your new home, your lender can issue bridge financing. Bridge financing is a short-term financial solution for securing a down payment on your next home while leveraging the equity in your current property. If your plan entails selling your existing home after purchasing a new one, a bridge loan may be indispensable until the proceeds from the sale are realized.
 
  • Once you've sold your old home and the money is ready, you can use it for the down payment on your new home. You can either withdraw the funds from your account as guaranteed money (like your deposit) or have your lawyer keep the money safe in their trust account until you're ready to buy your new place.
 
  • The third way to ensure your down payment is ready for closing is to have it available in your account ready to withdraw, the same as you did your deposit. Be prepared to withdraw it as guaranteed funds in the form of a certified cheque and ensure it’s made out to the intended recipient.
The size of the down payment can vary depending on several factors, including the type of mortgage, the buyer's creditworthiness, and the lender's policies. Generally, down payments range from 5% to 20%. The minimum downpayment is 5% on a mortgage and any down payment above 20% waives the need for mortgage insurance through either CMHC or Genworth. Check with a trusted mortgage advisor and your buyer agent for all the ins and outs of lending requirements and other details for your purchase.