A deposit is not the same as your mortgage down payment. You must budget for two separate payments when buying a house in Canada. A home deposit is intended to show the seller that you are seriously interested in purchasing the property. It can range between 1% to 5% of the home purchase price and is paid when you make an offer on a home. However, if you are not careful, you can lose the total deposit. Continue reading to become an expert on home deposits in five minutes.
The deposit amount changes depending on your city. Expect to pay a larger deposit in more competitive areas such as the Toronto housing market. You'll likely need a deposit worth 5% of the property price in competitive regions to secure the offer. However, in most of Canada, you'll only need a deposit of 1%. The deposit is applied to the final home purchase price upon closing. The initial deposit is factored into your mortgage down payment, meaning you'll need to pay a reduced down payment later
Your home deposit is paid to the seller when they accept your offer on a home. The deposit gives the seller a reason to take the house off the market while your transaction finalizes. The purpose is to show the seller you are a serious buyer and they no longer need to receive other offers. After agreeing to an offer, there are still unforeseen problems that can cause a real estate deal to fall apart. If you decide to back out at the last minute, the seller may be able to keep the deposit because they missed out on other potential offers.
When you make an offer on a home, you may require certain things to happen for the deal to finalize. This is known as a conditional offer, which may include a financing agreement, home inspection, and more. If your offer includes any of these clauses, you may be able to back out of the deal if:
These conditions are all included in your offer agreement. If you need to back out of the transaction for a condition included in your offer, you are eligible to receive your deposit back. These conditions are negotiated while making an offer and allow you to walk away with your deposit. However, if you walk away for a reason not included in your offer agreement, the seller can keep the deposit.
If the seller accepts your offer, a trust holds the deposit. In most cases, you pay the deposit to your agent, who transfers it to the seller's agent. The seller's brokerage saves the money in a trust account until the transaction finalizes. Each province has a provincial real estate board that oversees deposit safety.
For example, the Real Estate Council of Ontario (RECO) will protect you if your deposit is lost due to bankruptcy, fraud, or misappropriation. If the brokerage is not provincially regulated, you will not be protected. It would be best to use a reliable real estate lawyer to manage the trust account in this scenario.
Depending on the real estate market conditions, you can negotiate clauses in your offer to protect your deposit. A clause provides you with a pre-specified reason to get a refund on your deposit.
There are many more homes for sale in a buyers market than buyers. As a result, a buyer has more leverage to negotiate clauses that protect their deposit. For example, the buyer may negotiate a clause saying they will only complete the real estate transaction after selling their current house.
However, it's currently a seller's market in Canada. This means many more buyers are competing over a few homes for sale. Sellers have the opportunity to walk away from offers with unfavorable clauses. In some cases, there were offers without an inspection clause. As a result, buyers have less opportunity to negotiate clauses that allow them to walk away from an offer with their deposit.
Now you know everything about making a deposit on a home offer in Canada. Do your research and work with a trusted professional to avoid any stressful surprises. If you include conditions in your offer, you may be able to back out and receive your deposit back!