When buying a home in Canada, it’s easy to confuse the terms deposit and down payment, and many Canadians still do. Although both involve money you’re putting toward your home, they serve different purposes and happen at different points in the buying process. 

While a deposit becomes part of the down payment, knowing the differences between how they work and overlap can help you plan ahead, avoid cash flow issues, and understand what’s expected of you at every stage.

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Key Takeaways

• A deposit is paid first and is part of your total down payment.
• Your down payment includes the deposit and must meet at least the minimum amount required.
• You risk losing your deposit if you back out of a firm deal.

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Difference Between Deposit and Down Payment

A deposit is the amount you pay upfront when you make an offer on a property. It serves as a demonstration of good faith and proves that you’re a serious buyer who is committed to following through with the purchase. 

The down payment is the total amount you put down toward the purchase price, typically ranging from 5% to 20%, due on your closing date. The deposit forms part of your total down payment, even though it’s paid earlier in the homebuying process. 

What Is a Deposit?

The deposit is the amount you offer upfront with your purchase offer. It’s a show of good faith to the seller that you’re serious about buying. If your offer is accepted, this amount is held in trust until closing. Upon closing, the deposit amount will be added to your down payment. 

If your offer includes conditions for financing or a home inspection, this will protect your deposit if your mortgage isn’t approved or a home inspection reveals issues with the property. In this case, you can withdraw from the sale and have your deposit returned. If your offer doesn’t include any conditions, you typically lose your deposit if you back out of the purchase. 

What Is a Builder Deposit?

A builder deposit is paid directly to the developer when purchasing a new-build or pre-construction property. Unlike standard deposits, these deposits are much larger and paid in installments according to a schedule set by the developer. 

The deposit structure typically involves 20% of the purchase price, paid in separate installments: an initial deposit upon signing the purchase agreement, additional deposits as construction progresses, and a final payment made before closing.  

Deposit protections vary by province, which can cover you in case the builder goes bankrupt or breaches the agreement. Understanding how your funds will be safeguarded if the builder defaults or doesn’t complete construction on the project is essential before entering into a purchase agreement with a builder. 

What Is a Down Payment?

The down payment is the total amount you pay upfront to purchase the property. This amount is a percentage of the purchase price due at closing. 

In Canada, it’s a legal requirement to have a minimum down payment based on the home’s purchase price:

• 5% minimum on homes up to $500,000
• 10% minimum on the portion between $500,000 and $1,499,999
• 20% on homes $1.5 million and above

How Deposits and Down Payments Work Together

The deposit you make isn’t extra money being paid; it becomes part of your down payment at closing. These funds work together so you meet the regulatory requirements for a mortgage. Consider it an early installment of the down payment you will need to make. When determining your cash flow to fund a purchase, you only need to plan for the separate timing of each amount due. 

When it comes time to finalize the purchase, your entire down payment is due minus the amount you’ve already paid as the deposit. For example, if your total down payment is $80,000 and you’ve already provided a $30,000 deposit, you only need to bring the remaining $50,000 on closing day to complete the transaction. 

How Much Should You Put as a Deposit?

The amount you offer as a deposit largely depends on the real estate market and the level of competitiveness you need to maintain. There is no minimum deposit requirement or rules on how much to provide, so you can offer up as much or as little as you want. A higher deposit will signal to a seller that you are serious about purchasing and have your finances in order. This can give you an edge, especially in a bidding war or multiple-offer scenario. 

You should only commit to a deposit amount that you can access quickly and easily from your sources. If you haven’t provided the amount with your offer, it will be due quickly once your offer is accepted, typically within 24 hours. Ensure you have the funds available and can withdraw them within the specified timeframe via a money order, certified cheque, a wire transfer directly to the realty’s trust account, or a bank draft. 

Frequently Asked Questions

Final Thoughts

Understanding how deposits and down payments work together and planning when the funds will be needed can help you avoid last-minute stress and ensure a smooth purchase. While they contribute to your home purchase, their timing, purpose and legal implications differ. Being prepared for when each payment is due can make a big difference, especially in competitive markets or when navigating tight timelines.

For a customized mortgage strategy tailored to your savings, income, and homebuying goals, connect with a nesto mortgage expert today.

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