What is the difference between deposit and down payment? This is the most frequently asked question for buyers. As a buyer it’s important to know the difference between the two. Each payment is made during the purchasing process, but it is done so for a different occasion and with a different goal.
Whether you are a first-time home buyer or a repeat house buyer, mortgage language can be complicated! The deposit and down payment do differ significantly in certain important ways, most notably in terms of their amounts and timing. Let us assist you understand what each of them means and how you will use them during the buying process.
A deposit serves as a form of security for the seller, holding the purchaser liable for upholding the terms of the purchase and sale agreement once the deal is finalised.
A deposit is typically required either immediately after or within 24 hours of the subject being removed, depending on how the contract is written. The deposit is not required if subjects have not been removed.
The deposit serves as proof that the buyer is ready to commit to the purchase and that they intend to close the sale once the subjects have been removed. A buyer would only lose their deposit if the were subjects but later decided not to finalize the purchase. In that case, the buyer might forfeit the deposit to the seller.
Up until the completion date, a deposit is held in trust by a third party (typically the brokerage of the buyer’s agent), at which point it becomes part of the down payment.
The TOTAL amount of money that the buyer contributes themself to the purchase of a property is the down payment. This could take the shape of cash savings or other types of savings, such as money taken out of an RRSP as part of the home buyer’s plan.
The difference between the purchase price and the mortgage loan amount will be covered by the down payment. It is simply the amount that the buyer contributes to the purchase of a home (before accounting for closing costs).
The down payment can be calculated as follows since it is the sum that the buyer pays up to the value of the mortgage:
Purchase Price – Value of Mortgage = Total Down Payment
The deposit becomes a portion of the down payment if a real estate transaction is successful and is then applied to the purchase price. As a result, even though they are not the same and are paid at various periods, it counts as part of the down payment.
In the Greater Vancouver resale market, a standard down payment is 5% of the purchase price.
The deposit amount is flexible and subject to change based on local market conditions. Since it is often calculated on a percentage basis, the sum is based on the property’s market value.
When evaluating offers in a market like Vancouver, a seller will typically require a minimum of 5% of the purchase price, and depending on if there are multiple offers on the property, they may expect more.
The down payment is not a set amount and is determined by the lender’s guidelines and the property’s value. The smallest down payment you can make toward a home purchase in British Columbia is limited by a minimum down payment requirement.
While 5% is the standard deposit amount, down payments can be anything from 5% to 20% or more of the total value of the property.
Different down payments are necessary depending on the situation, but in British Columbia, the general minimum down payment requirements 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
Purchase Price – Mortgage – Deposit = Remaining Down Payment Funds Due at Completion
Regardless of the purchase price, most banks will demand a minimum 20% down payment if you’re buying an investment property.
DEPOSIT: The deposit is often required either immediately after or within 24 hours of the subject’s removal. Because the deposit serves as a commitment to finalize the transaction, it is paid BEFORE the down payment (if you decide to continue forward with the purchase and remove subjects).
DOWN PAYMENT: The down payment won’t be required until the scheduled completion date. The deposit is a portion of the down payment. You can use this calculation for the deposit and down payment:
Deposit (due within 24 hours of subject removal) + Remaining Down Payment (due at completion) + Mortgage (done at completion) = Purchase Price
To guarantee that the deposits are handled professionally and properly throughout a real estate transaction, always verify that you have the appropriate representation and have engaged both a realtor and a lawyer to represent you.
DEPOSIT: The buyer’s agent brokerage will typically hold the deposit in trust if the property is a resale (sold from a seller, rather than a developer). The deposit should be given in trust to a designated solicitor in the event that the property is sold without buyer representation.
When purchasing a home, DON’T transfer a deposit straight to the seller because there is always a danger that they won’t return it or that they’re a person pretending to be the real owner.
If the property is a presale or new construction (sold by the developer), it is pretty standard for the deposit to be paid out to the developer’s solicitor in trust or to the brokerage of the developer’s sales/marketing staff in trust. It is important that you take time to read the presale contract to understand how each deposit should be made out and to whom specifically.
DOWN PAYMENT: The buyer often gives their legal representative a bank draught to pay the balance of the down payment directly to the notary or lawyer on their behalf.
Prior to closing, it is imperative to confirm with your legal representative how much money will be needed (down payment and closing costs included) and how they like payment to be received.
A home is being purchased by the buyers for $800,000 in total. They will make a $80,000 down payment, or 10% of the purchase price. On October 1 the subjects are removed, the offer becomes a firm offer, and the transaction will close on October 8.
Deposit: To reserve the property, they instantly pay a $40,000 deposit (5% of the purchase price)
Purchasers will be required to pay the remaining down payment of $40,000, or a total of $80,000, at the time of closing.
Need a bit more clarification? No problem! We can help. Reach out to Team Kleiner today!
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Mary and Konstantin Kleiner | REALTORS® | Oakwyn Realty Ltd. Independently Owned & Operated | (604) 332-8335 | 3195 Oak Street, Vancouver, BC V6H 2L2 | Team Kleiner © 2021
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