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Deposit or Down Payment - The Difference?


Blog by Claire LeLacheur | February 14th, 2016


If you’re a first time home buyer, there are a few things you need to know before you make your sale. One key element of buying a property is the financial aspect, so it’s important to know the difference between a deposit and down payment. Although both words sound very alike, they’re critical to the buying process and have very different meanings, so it’s essential that you’re clear about what they involve.

 

Deposit

As the REW.ca explains, the deposit is the money that you put down to secure the sale of the home to prove that you are serious about the purchase. Deposit amounts can vary and there is generally no set amount (however it’s often 1 to 5%), and it is decided by the real estate agent. The deposit is integral to a buyer’s offer and acts as a security and incentive for the seller to take the property off the market.

 

If the buyer pulls out of the property without going through with the home purchase and for a reason that isn’t allowed in the contract, such as changing their mind, the seller may be able to keep the deposit. If you’re competing against other prospective buyers, a larger deposit may set you apart and secure the sale. If the deal goes ahead, the deposit becomes part of the down payment for the home. When you put down a deposit, it’s important to read the contract and refund clause so you know your rights in case you want to pull out of the sale.

 

Down Payment

The down payment is the money that the buyer puts forward when they purchase the property, and is usually between 5 to 20% of the total home sales price. A mortgage lender will provide the remainder of the money and monthly payments will be required. Down payment percentages can vary depending on the type of property, for example, whether you’re purchasing the property as a home or as a rental property. The down payment amount is often established early in the buying stage.

 

Generally, your chances of getting your mortgage approved are greater when you put down a higher down payment, as your monthly repayments will be smaller and you’ll have more equity in your home. Plus, you will be charged interest on your mortgage so the higher the down payment, the less interest you’ll pay in the long run.

 

In plain terms, the deposit is the money you put down to express your commitment to the property, and the down payment is the amount of money required in order to get a mortgage on the home.

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