A deposit can be commonly mistaken as your down payment. However, a deposit may be asked for by your estate agent to include with your offer. This basically acts as an offer of good faith to show the seller that you are serious about purchasing their property and unlikely to back out of the sale.
This isn’t an extra cost on your property; it will just be set against the total value of the property’s purchase price. However, how much should you set against the property, or should you even do it at all?
How much is a typical deposit?
This isn’t easy to define as many people look at this differently. An estate agent will generally request something in the range of 1% of the purchase price. For example, on a $500,000 property, you might be requested to put $5,000 down as a deposit. However, it is somewhat area-specific and socio-economic-specific. For example, in Toronto, it is a common understanding that a 5% deposit is the norm. This can significantly impact people’s budgeting for their dream property, as a deposit can end up being a significant chunk of money, and you also still need liquid cash to pay for your down payment.
You must be certain about the property due to the significance of the amount of money you’re certain about. If you back out for any reason, the seller will be able to keep the deposit. It would be recommended that you still get a home inspection, and you could make it a part of your offer that the deposit is returned if anything major comes to light in the home inspection stage.
When do you pay a deposit?
The deposit will be paid when your offer is accepted, and you sign the accepted Offer to Purchase. This is the stage in which the seller has officially accepted your offer and wishes to move forward with the property’s sale.
However, you will pay the balance of the deposit before any of the mortgage financings is completed. Therefore it is a cost before your down payment.
Who do you pay a deposit to?
Your deposit will be paid directly to your real estate agent when you sign the accepted Offer to Purchase.
The agent will then transfer the balance to the seller’s real estate agent, who will handle the cash until the property sale closes.
Once the property successfully closes, this will be passed onto the seller. This is an important factor, as it means the seller does not actually possess your deposit until the property’s final closure. This acts as protection for your funds if the property sale falls through for any reason, which is not your fault.
What happens to my deposit if the property sale falls through?
The cause of the falling through the property will be the key determinant of the deposit here. If you back out of the purchase, the seller will be able to keep your deposit. You may be able to include some clauses in your offer where the deposit could be returned (for example, if the home inspection results in something major). However, because of the high cost of a deposit, it is essential to make sure you’re 110% certain about the property, as it can be a costly decision if you decide to change your mind.
However, if the seller pulls out of the sale and it is their fault the sale did not go ahead, you are well within your rights to receive the deposit back, and in this case, the seller’s agent will return the balance to you. The agent effectively acts as an escrow account until the sale goes through in this case, so there is little risk of the seller running away with your deposit.
Do note that a deposit can be a large chunk of your property budget. Therefore significant thought should be put into whether you are financially able to put down such a significant deposit (generally between 1% & 5%) and whether you’re entirely committed to the property for the duration of the sale period. Otherwise, a change in your mind could have a detrimental impact on your home-buying potential.
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