Mortgages: What is the typical deposit amount for buying a house in Canada?
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A down payment is often confused with your equity. However, the real estate agent may ask for a deposit to be attached to your offer. This is essentially a good-faith offer to show the seller that you are serious about purchasing their property and that you are unlikely to withdraw from the sale. This is not an additional cost to your property; it will simply be deducted from the total value of the purchase price of the property. However, how much do you have to put down on the property? In fact, should you do it?
What is a typical down payment?
This concept is not easy to define, as many people view it differently. A real estate agent will usually charge an amount in the range of 1% of the purchase price. For example, for a $500,000 property, you may be asked to put $5,000 down. However, this amount is more specific to a region and socio-economic situation. For example, in Toronto, it is commonly accepted that a 5% down payment is the norm. This amount can have a huge impact on the budget people spend on their dream property, as the down payment can end up being a significant amount of money, and you also need cash to pay your down payment. You must be certain of ownership because of the amount of money involved. If you withdraw for any reason, the seller may retain the deposit. A home inspection is recommended, and you can stipulate in your offer that the deposit will be refunded if the inspection reveals anything significant.
When should 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 at which the seller has officially accepted your offer and wishes to proceed with the sale of the property. However, you will be required to pay the balance of the down payment before themortgage financing is completed. This is a cost to be paid 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 then transfers the balance to the seller’s real estate agent, who manages the cash flow until the sale of the property is completed. Once the sale is completed, this amount will be transferred to the seller. This is an important factor because it means that the seller does not actually have your down payment until the sale is completed. Your funds are protected if the property sale fails for any reason that is not your fault.
What happens to my deposit if the sale of the property is not successful?
The cause of the sale’s failure will be the determining factor here regarding the deposit. If you withdraw from the purchase, the seller may keep your deposit. You may be able to include clauses in your offer providing for the refund of the deposit (for example, if the home inspection reveals something major). However, due to the high cost of a down payment, it is essential to ensure that you are 110% sure of the property, as this can be a costly decision if you decide to change your mind. However, if the seller withdraws from the sale and it is their fault that the sale did not proceed, you are fully entitled to recover the deposit, 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 closes, so there is little risk of the seller absconding with your down payment. Note that a down payment can represent a significant portion of your real estate budget. Therefore, serious consideration should be given to whether you are financially capable of paying such a large deposit (typically between 1% and 5%) and whether you are fully committed to the property throughout the duration of the sale. Otherwise, changing your mind could have a negative impact on your home-buying potential.
