If you’re buying a house, you’ll want to get familiar with some real estate jargon. And while many terms may not impact you much, others are of particular importance, like “home deposit” and “down payment.”
Many newbie homebuyers may assume that these terms are just different words for the same thing, but they’re not. There are important differences between the two that all homebuyers should be aware of.
Let’s take a closer look at deposits and down payments to see how they compare, and how they differ.
Key Points
- A home deposit is made at the time of the offer and is due within 24 hours of offer acceptance.
- The deposit becomes part of the down payment at closing.
- Deposit amounts can vary across Canada, as there is no set amount required.
- Down payments are a percentage of the purchase price and include the deposit amount.
Home Deposit Vs Down Payment: Snapshot
| Deposit | Down Payment | |
| Amount Required | No set amount (depends on location and market) | 5% — 20%+ of purchase price |
| When It Is Required | Within 24 hours of offer acceptance | At closing |
| Where Funds Go | Listing agent’s brokerage | Buyer’s lawyer |
What Is A Home Deposit?
A home deposit is a lump sum of money offered upfront along with an offer to buy a home. Deposits are typically required from buyers to show that they’re interested in purchasing a home and promise to follow through with the deal.
The deposit also shows the seller that the buyer has the financial means to buy the home. The deposit goes towards the down payment of a home once the deal closes.
House Deposit: The Process
When you find a house that you want to buy and put in an offer, you’ll have to include the deposit amount in the purchase agreement. This is one of many components that the seller will look over to assess the strength of the offer.
Depending on the climate of the market and the exact location in which you’re buying, you may have to bring a deposit cheque with you at the offer table. Otherwise, the deposit cheque will have to be dropped off at the listing agency within 24 hours of offer acceptance. You’ll need to make sure that you have the funds readily available to be withdrawn from your bank account, as the deposit cheque will be cashed shortly after offer acceptance.
Once the deal closes, the deposit will become part of the down payment and will go towards the purchase price of your home. For instance, let’s say you plan to make a down payment of $50,000 and offer up an initial $15,000 as your deposit. Once the deal closes, that $15,000 will be applied to your down payment, so you’ll need to come up with the other $35,000 when you secure a mortgage to finance your purchase.
Keep in mind that if the deal falls through because of some form of breach of contract on your part, you may risk losing that deposit.
How Much Is A Home Deposit?
There’s no minimum deposit required. You could put as much or as little as you want. However, most home deposits are usually between 1% to 5% of the purchase price of the home, though they could be bigger depending on where you’re buying. In fact, 5% deposits have become the norm in big cities like Toronto.
The higher the deposit, the more attractive your offer will be. And if you’re in the midst of a bidding war, going in with a hefty deposit might be required to make your offer stand out.
While the seller will be able to keep the deposit, it doesn’t go to the seller right away. Instead, the funds will be held in trust by the seller’s real estate brokerage. Home deposits are usually in the form of a certified cheque, bank draft, or money order. While your deposit is held in trust, it will accumulate interest.
What Happens If I Don’t Have The Money For A Deposit?
When you sign a purchase agreement, you are agreeing to all its terms, including the promised deposit amount. A purchase agreement is legally binding, which means you’re legally required to follow through with the terms of the contract.
If you state that you’ll make a specific deposit amount in the agreement, and the deal goes firm, you’ll be expected to make that payment before it’s due. If you don’t, you could open yourself to litigation from the seller. For this reason, it’s important to ensure that you have the cash ready and available in your account before choosing the amount of your deposit in your offer.
What Is A Down Payment?
A down payment is a lump sum of money that is paid upfront when taking out a mortgage to buy a home. Your down payment is due when your mortgage closes.
Down payments are usually expressed as a percentage of the purchase price of a home. So, if you were to make a 10% down payment towards a home that you’re paying $500,000 for, your down payment amount would be $50,000.
How Much Is A Down Payment?
The amount of your down payment will depend on a number of factors, including the following:
- The type of mortgage you’re taking out
- Your financial profile
- Your credit score
- The price of the home
Generally speaking, you’ll need to put down at least 5% of the purchase price of the home. More specifically, the following down payments will be required based on the home price:
- Purchase prices less than $500,000: minimum of 5%
- Purchase prices between $500,000 and $999,999: minimum of 5% of the first $500,000, and 10% of the remainder exceeding $500,000
- Purchase prices of $1 million or more: minimum of 20% (*Note: Effective December 15, 2024, the home price cap for insured mortgages will increase to $1.5 million)
The higher the down payment, the better, for many reasons. For starters, it will mean lower monthly mortgage payments and less debt overall.
In addition, a higher down payment amount can help you avoid mortgage default insurance.
Mortgage Default Insurance Requirements
It’s important to note that down payments of less than 20% of the purchase price of a home will require mortgage default insurance. Also referred to as CMHC insurance, mortgage default insurance protects the lender and premiums are paid by the borrower. However, mortgage default insurance is not available on homes over $1 million (which will increase to $1.5 million as of December 15, 2024), which is why a minimum 20% down payment is required.
Smaller down payments mean more risk to the lender, as a higher loan amount will be required. And because of this increased risk, the lender needs to be appropriately covered.
Who Is The Down Payment For?
While the deposit must be paid upon offer acceptance, the down payment doesn’t need to be paid until the closing date. Your lender will require the down payment when closing on the mortgage.
Home Deposit vs. Down Payment: What Happens If The House Doesn’t Close?
If a deal on a home purchase fails to close, your deposit and down payment will be affected differently.
Home Deposit
If the deal to buy the home doesn’t close, your deposit could be at risk, depending on the reason for the failed deal.
If you include conditions in your offer — such as a home inspection or financing condition — you can back out of the deal without consequence if the conditions are not satisfied and you notify the seller before the condition’s expiry date. In this case, you should have your deposit returned to you in full. But if you back out without any condition in place, or you fail to fulfill or waive the conditions before their expiry dates, the seller may be able to keep your deposit.
Deposits Compensate Sellers In Failed Deals
Keep in mind that while the sale was “conditional” — which means the conditions included in the purchase agreement either needed to be fulfilled or waived within a certain period — the seller could have been showing the home to other prospective buyers.
When the deal falls through, they have to start over again, which means the seller missed out on time they could have been marketing their home. The deposit may help provide them with some financial recourse in this situation.
In some cases, the situation may have to be ironed out in court when it comes to whether the seller can retain the deposit or whether the buyer can get their deposit money back when a house doesn’t close.
Down Payment
If the deal on the house doesn’t close, there will be no need for a mortgage. And with no mortgage, no down payment is required.
However, since the deposit goes toward your down payment, you’ll need to make up for this portion of the down payment if the seller has the right to keep it. If the deal doesn’t close and you lose your deposit, you’re essentially losing part of your down payment. This leaves you in a situation in which you’ll have to save up that money lost when it comes time to make an offer on another home.
What If I Need Help Coming Up With A Down Payment?
Depending on your situation, you may qualify for programs that are designed to help Canadians buy a home:
Home Buyers’ Plan
The federal government offers the Home Buyers’ Plan, which allows first-time home buyers to borrow up to $60,000 from their RRSPs (or up to $120,000 for couples) to be put toward a down payment on a home purchase.
Even though the funds in your RRSPs are largely contributions you made, you must still repay the funds you borrowed. Repayment doesn’t start until the fifth year after you withdraw the funds from your account, and you have 15 years to make the full repayment. If you pay back the money before the 15-year period is up, you won’t be taxed on the amount borrowed.
First Home Savings Account (FHSA)
The federal government offers the FHSA to help young Canadians under 40 buy their first home. You can use this account to save as much as $40,000 for a home purchase.
This account is tax-free, which means any interest or gains earned are not taxed. Further, your contributions to your FHSA are tax-deductible, which means you can use these deductions to reduce your taxable income and pay less come tax time.
Provincial Down Payment Assistance Programs
Provinces that have their down payment assistance programs for residents who qualify, such as the following:
- Ontario (Kitchener/Waterloo Region): Affordable Home Ownership Program
- Quebec (Montreal): Accès Condos program
- Alberta (Calgary): Attainable Homes Program
- Manitoba (Some Rural Areas): Homeownership Program
- New Brunswick: Home Ownership Program
- Nova Scotia: Down Payment Assistance Program (DPAP)
- Prince Edward Island (PEI): Down Payment Assistance Program
Final Thoughts
Real estate vocabulary can be confusing for buyers, especially first-timers. But it’s important to understand the terms used. For example, terms like home deposits and down payments may be confused and used interchangeably. But they’re different, and it’s important to understand how and why they differ.
