Mortgage Basics

House Deposit vs Down Payment

House Deposit vs Down Payment
Written by
  • Christine Beaudoin
| Oct 22, 2020
Reviewed, Jun 5, 2023

Table of contents

    There are a number of transactions throughout the home buying and mortgage processes that require money to be transferred by the home buyer to either the seller’s real estate agent, the seller’s lawyer or the mortgage lender. It’s important to understand what each transaction requires, however, to ensure you’ve budgeted the appropriate amount of money to make home buying as stress-free as possible. 

    See: Closing Costs: What are They and How Much Will You Pay?

    Two common payments that home buyers – particularly first-time home buyers – use interchangeably are “deposit” and “down payment”. We’ve clarified the differences below as these two payment types are not the same.

    Key Takeaways

    • Two common payments in the home buying process that are often mistakenly used interchangeably are “deposit” and “down payment”
    • A house deposit is upfront money often required from the buyer to show the seller there’s interest in buying the home
    • A minimum down payment is mandatory in order to get approved for a mortgage on your new home

    Are you a first-time buyer?

    What is the difference between a deposit and a down payment?

    What is a house deposit?

    When buying real estate, in most cases, you’ll be required to provide an upfront cash deposit, which is used to demonstrate to the seller that you’re committed to making the purchase. And once the home closes, you can redirect those funds towards closing costs and your down payment.

    Important: One reason why “deposit” and “down payment” could be mistaken for the same payment type is that they typically both equal at least 5% of the home’s purchase price.

    What is a down payment?

    A down payment involves putting money towards the purchase of your home. The minimum down payment when buying a house in Canada is 5% of the purchase price for a home valued at $500,000 or less and 10% for the portion of the purchase price above $500,000. 

    If you can make a larger down payment than the minimum requirement, your mortgage payments will be lower and it will take you less time to pay off your mortgage. The smaller your mortgage and the lower amount of interest you’ll pay over your time as a mortgage holder, the quicker you can build home equity. See: How Much do You Need for a Down Payment in Canada?

    See: How Much do You Need for a Down Payment in Canada?

    Am I required to pay a house deposit?

    When purchasing a house in Canada, there are typically a number of fees and costs associated with the process. These can include things like legal fees and land transfer taxes, but one of the most common is the house deposit.

    Essentially, this is an amount of money that must be paid up front when beginning a real estate transaction. The amount can vary depending on a number of factors, including the house’s purchase price and location.

    While many people may be concerned about having to pay such a large sum of money, it is important to keep in mind that this house deposit will typically be subtracted from the final sale price once ownership has been transferred. As such, there is no need to worry about being able to afford this initial payment.

    Many homebuyers find that paying a house deposit actually saves them money in the long run by limiting their exposure to interest charges.So whether you are buying your first home or your tenth house, it is important to familiarize yourself with the house deposit requirement and work out an appropriate strategy for securing your new property quickly and efficiently.

    How much should I expect to pay for a deposit?

    When going into the purchase process, one of the first things that you need to consider is the house deposit. Typically, there is no minimum deposit required and the amount is left up to the seller, though it will typically be at least 5% of the purchase price.

    On closing day, the house deposit will usually be put towards your down payment and closing costs. By making an adequate house deposit, you can ensure that you have sufficient funds available when it comes time to complete the purchase transaction.

    Additionally, by coming prepared with a solid house deposit, you can demonstrate to both yourself and potential sellers that you are serious about buying a house and are committed to completing the transaction.

    Mortgage payment plans aren’t meant to be one-size-fits-all.

    Chat with a nesto mortgage expert & get a mortgage payment fit to you.

    If I change my mind, could I just not submit a deposit and get out of the purchase?

    While it is generally not advisable to back out of a house purchase after submitting a deposit, there may be certain situations in which this is possible. If you find that the property has major structural issues or is in an unsafe neighborhood, you may not want to purchase it.

    Alternatively, if you experience some kind of major personal crisis or other unforeseen circumstance between signing your contract and finalizing the sale, a judge or arbitration board may determine that it was reasonable for you to withdraw from the deal.

    Ultimately, whether or not you can get out of your house purchase will depend on the specific details of your situation and any contingencies written into your contract. However, with careful consideration and legal support, it may be possible to take back control of your situation and walk away from this investment with minimal financial losses.

    How do I pay the deposit?

    When buying a home, your deposit is typically made payable to the listing agent or the seller’s lawyer “in trust”. This means the listing agent or lawyer must keep the money in a trust account until the closing date.

    Tip: The term “in trust” means that the deposit is being held in a trust account until the real estate transaction closes and the funds are instructed by the real estate agreement or legal professional.

    What if the home doesn’t close?

    In most cases when deals don’t close, the buyer and seller agree to end the transaction and sign a mutual release. But, when the two parties fail to agree – for instance, when the seller backs out of the deal without just cause – the deposit must remain in the brokerage trust account until a court order is obtained.

    Final thoughts on house deposit vs. down payment in Canada:

    So, what have we learned? A house deposit and down payment are both terms used to describe the initial funds put towards the purchase of a home.

    The difference is that a house deposit is non-refundable, while a down payment may be refunded if the sale falls through. In Canada, you need at least 5% of the purchase price as a down payment in order to get a mortgage. However,

    it’s always best to consult with an expert before making any decisions – especially when it comes to something as important as your home. If you want more information about mortgages or housing in Canada, chat with one of our experts today.

    Mortgage payment plans aren’t meant to be one-size-fits-all.

    Chat with a nesto mortgage expert & get a mortgage payment fit to you.

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