When buying a home in Toronto there are two “terms” that are often confused or used interchangeably with each other.

Today I explain the difference between a “Deposit” and “Down-Payment” when buying a home in Toronto.⠀

Whether you’re buying a house or buying a condo in Ontario you must pay a deposit within 24 hours (1 business day) of your Offer to Purchase being accepted by the Seller.

The purpose of a deposit is of a legal nature in order to have a legally binding agreement.

Usually the Buyer will pay the deposit to the Seller’s Real Estate Brokerage in ‘Trust’. Alternatively, it can be paid to the Seller’s lawyer in ‘Trust’.

This means the Brokerage or Lawyer maintains a “Trust” bank account which ensures the money is safe & secure.

The deposit amount will be deducted from the purchase price upon closing (a.k.a. applied to the purchase price).

The deposit is NOT (should not) paid directly to the Seller.

On the other hand, a down-payment is an amount the lender or bank requires you to pay upon the closing date of your purchase if you’re getting a mortgage.

The down-payment is paid to the Lender (Bank) and applied to the purchase price (as well) which reduces the overall amount that you are  borrowing in the form of a mortgage.

The MINIMUM down-payment required by a Lender is often a percentage of the purchase price such as 5% or 10%.

However it can ultimately be any fixed amount as long as it meets the minimum requirements of the Lender or Bank.

So if you were to buy an $800k property and you have $95k to put down as a down-payment that amount is neither 5% nor 10%.

But as long as it is greater than the minimum required that is acceptable.

These days Lenders/Banks require (depending on personal circumstances & varying policies) a minimum of 5% down payment although that minimum has been said to be increasing closer to 10% for some Lenders recently.

In other words, the bank won’t lend out a mortgage of 100% of the  purchase  price.

If you bought a house for $800k and the bank gave you the full $800k then it would be too risky for the bank if the real estate market went down and they had problems collecting mortgage payments from you.

Obviously if the market went down slightly and you kept paying your mortgage, and you planned to live there for many years then there’s no risk to you.

But the Banks & Lenders want to protect themselves just in case someone loses their job OR can’t pay the mortgage.

The Bank wants to know that if they ever had to force “Power of Sale” to collect their money that the property will always be worth as much as the amount which is owed to them.

So the minimum down-payment acts as a safety buffer for them.

Keep in mind that if you are paying a down payment of less than 25% of the purchase price you are required to get an insured mortgage.

Basically the mortgage insurers will charge an upfront fee to insure the mortgage.

Insurance is only mandatory on high ratio mortgages (eg. lower down payments).

If you are putting down 25% or more of the purchase price as a down payment you generally do not require mortgage insurance.

If you want to know more about down-payments & deposits you can email or call me any time. 

If you are thinking of buying a house or buying a home anywhere in the Greater Toronto Area and want to talk more about how to do it safely and smoothly I’m always happy to chat.  Just get in touch with me.