When buying a new home, especially as a First Time Home Buyer it’s easy to get terms mixed up or misunderstood. Something as simple as deposit and down-payment might seem like they’re the same thing, but in fact they’re not….
The deposit is the amount of money that you put down to secure the property that you are purchasing. A deposit is an amount given to guaranty the buyers intention to purchase the property. The amount of deposit is not a set value, it could range depending on the value of the property. That amount will depend on the purchase price and how far along you are to closing the sale. If the sale of your home does not close, the deposit is lost.
The down payment is the Money That You Put Up Front When You Purchase a Property. Down payments typically range anywhere from 5 per cent to 20 per cent of the total value of the property. The minimum down payment required to purchase a property is 5 per cent. When you close on the house, the deposit will become part of the down payment. It is important to know about the difference between a deposit and a down payment so you Budget accordingly .
To clarify the difference, consider the following two examples:
Let’s say John and Sarah are buying Martin’s house for $300K. To guarantee their intention to purchase, Martin requests a deposit of $5000. If John and Sarah fail to close on the home, this money will be lost. However, when they do close, the $5000 will be put toward their down payment. In this case, their down payment is 20%, so in total they are putting down $60,000 ($55,000 + the $5000 they have already given as a deposit).
Another example would be, George and Sam are purchasing a pre-build and many times when you buy a $400K pre-build or “New Construction” Condominium you need to give deposits which are usually spread over 2-3, which in our example could total $30,000 as the Deposit . You can leave that deposit to be the down payment OR you can actually take money back and only leave the minimum required of 5% as the down payment. It’s a common misconception that the deposits given must stay as the down payment, which it is NOT.
Meaning at closing $400K at 5% down = $20,000, you would then at the lawyers office have $10,000 available. The total amount of deposits being $30,000 and only requiring $20,000 as down payment you can use those funds to then cover land transfer tax, legal fees or just take it home to furnish your house.
Helpful Tip: It’s also a further misconception that RRSP’s when withdrawn under the 1st time home buyer plan must also be used directly for the down payment, which again is also a fallacy and can be used at the discretion of the home buyer for any need (say a nice new 4k HD TV … or James’ birthday present
The deposit and the down payment are terms that are often confused, but it is important to know the key difference between the two especially if you are thinking about Purchasing a House.
For more information please feel free to contact us at 289.337.4029.