Deposit with offer vs down payments
TL;DR: a deposit with offer is a show of seriousness when you're negotiating an offer to purchase a property, while the down payment is the total amount of money you will put forward towards the purchase of your home. If your offer is accepted, the deposit is held and becomes part of the down payment.
It’s important to understand what sets them apart so you don’t get confused when it’s time to secure financing on a property once you have an accepted offer.
Deposit with offer
Show of good faith / skin in the game
A deposit, as it relates to real estate, is money that is included with a purchase contract, as a sign of good faith. It is the consideration that helps make up the contract. It’s what is used to bind you to the contract. Typically, when you make an offer to purchase on a property, you would include a certified cheque or a bank draft that gets held by your real estate brokerage while negotiations are being finalized. If your offer is accepted, the deposit is then placed “in trust” where it is held until just before your mortgage closes.
The final step is when the deposit is transferred to the lawyer’s trust account and is included as part of your down payment. After the offer is accepted and deposit held in trust, you will carry out the steps to satisfy the conditions on your offer - namely the home inspection and the condition of financing in time for the deadline in the offer, called the Condition Day, or Subject Removal Date.
Refundable if you do not waive the buyer conditions on your offer, non-refundable if you do
If you aren’t able to reach an agreement and the offer is ultimately not accepted, or if you choose not to waive your home inspection or financing condition, the deposit is then returned to you. However if you waive conditions, and then you back out of that agreement, your deposit is forfeited to the seller. Now, although the deposit is separate from the down payment in that it’s money that goes ahead of the down payment in the negotiation of the purchase, once everything is finalized, the deposit is then included in and makes up part of the total down payment.
Deposit amount can be a negotiating point
The amount you put forward as a deposit when negotiating the terms of a purchase contract is arbitrary, meaning there is no predefined or standard amount. Instead, it’s best to discuss this with your real estate professional as your deposit can be a negotiating factor in and of itself. A larger deposit may give you a better chance at having your offer accepted in a competitive situation. It also puts you on the hook for more if something changes down the line and you aren’t able to complete the purchase.
The down payment can be defined as the initial payment made when something is bought on credit. In Canada, as it relates to the purchase of real estate, the minimum down payment amount is 5% on properties worth up to $500,000, and 10% on any amount over $500,000 up to $999,999 (the minimum is 20% on $1,000,000+). This means that you have to come up with a minimum of 5% of the total price of the property you are purchasing. The lender will allow you to borrow the remaining 95% of the property value on credit through mortgage financing.
If you have 20% of the purchase price of the property available for a down payment, you may qualify for conventional financing, which means you aren’t required to pay for mortgage default insurance through a provider like CMHC.
Let’s say that you are looking to purchase a property worth $400,000. You’re planning on making a down payment of 10% or $400,000. When you make the initial offer to purchase on the property, you put forward $10,000 as a deposit which is held by your real estate brokerage. The sellers aren’t comfortable with that amount, and they request you increase the deposit by $5,000. You agree to these terms and the contract is finalized, you would then send another $5,000 to your real estate brokerage trust account making a total deposit of $15,000.
Your deposit is held in trust until such time that it is sent to the lawyer’s trust account where it’s combined with the remaining $25,000 that you will bring to the lawyer at closing for the rest of the down payment.