The Difference Between a Downpayment and the Deposit Cheque

I’ve gotten this question a few times from my very novice buyers and I can see why there might be confusion or misunderstanding about the difference between the two.

Because there can be so much to think about and worry about during the homebuying process from banks and lenders, to mortgage agents to home inspectors and of course your real estate agent and coach.

And like I always advise my clients, you always need to take care of the financing aspect of things FIRST meaning, to make sure you have enough money to actually purchase a home, cover all the monthly expenses and mortgage and still be able to save for contingencies and of course for your own retirement.

But I thought thought this post might be helpful in letting you understand the difference or in fact the same-ness of these two terms in the real estate speak that we use here on a daily basis here at Selling Toronto.

Now let’s begin…

The Downpayment

So the downpayment is in fact the whole amount of money you need to save up in order to qualify for a mortgage and to buy a home. In layman’s terms, the bank or a lender is willing to loan you money to buy a property sometimes up to 95% of the value of that property but what they want to see is that you have some “skin” in the game - you know, the hard earned dollars you’ve been scrounging and saving for the last 10 years - in essence, you gotta have some money in your own property too right guys??

And while most buyers in Toronto and the GTA still usually wait to save up roughly 20% in order to avoid paying mortgage insurance costs, sometimes it is more beneficial to actually go for the mortgage insurance but we don’t go into much detail here in this post because that’s not the point here. But let’s just say for simplicity you’re looking to buy a $500,000 condo somewhere in the GTA and you’ve worked hard - overtime, double time, extra time to scratch and save up $100,000 as your downpayment which represents the 20% threshold.

And let’s just say for simplicity that based on your downpayment, your debt ratios, credit score and employment situation/status and your income and employment prospects are all good, then you can start looking at properties, finding the right one and then submitting offers. And it is exactly at this point where most first time buyers will get tripped up between their initial downpayment to discover that now when you find a home and you need to put in an offer, you need to create a certified cheque or bank draft to secure the property and get the seller to accept your offer and usually it’s around 5% of the value of the prospective home.

The Deposit

Often times, potential buyers will think they need to come up with MORE money but I’m here to say that that is blatantly wrong. If you’ve run the numbers or worked with someone who can run the numbers better than you (we know a few we can refer you to), and you qualify and you’re finally ready to buy, simply, the deposit is a cheque that yes the listing brokerage takes and holds “in trust” once a deal has been accepted and do so until eventual closing (when you get the keys and the funds are transferred over via lawyers). And to be absolutely 100% clear, this money is used in part of the calculation of your downpayment and when you or your agent drops this cheque off to the listing brokerage or lawyer, it is mucho importante that all parties involved from the bank/lender/mortgage professional to all the agents and both brokerages involved will need a copy of said receipt because this is proof that the deal is secure and that you have the funds to move forward with the deal.

The lawyers are the ones who eventually calculate all the numbers, who owes what, money goes where amongst a host of other things that again, I will leave out for simplicity. But rest assured, no need to freak out, the deposit is all a part of your grand downpayment plan but I can see where the confusion lies - could be because both start with a “D.” We normally try to advise our clients as early as practicable possible whenever we start looking at properties to ensure they have liquid cash on hand in case we do find something they like and want to move on because if the money is tied up somewhere else in investments, RRSP’s or even with the bank of mom and dad and they’re off on their Mount Everest excursion again without data access and you’re ready to put in an offer but the money isn’t ready and there, uh-oh you may just lose the house or condo - that’s how important the deposit can be.

And while many people also get confused about when the downpayment money needs to be ready, of course it would be best if it was liquid and ready at offer times but you really only need the remaining funds (minus the deposit) several days before actual closing when you will go to the bank and likely get only the biggest cheque you ever saw in your life and hand it off to some lawyer you barely ever talked to - essentially cleaning out your entire bank account.

But don’t worry, it’s all part of the process and all in a day’s work for us here at Selling Toronto and I just thought it “might” be helpful to some of you who were confused between the two. Normally, we don’t discuss these items until the time is necessary with our clients but for some who like to have all the information ahead of time and take notes, ask questions and who regularly carry around a binder of information just for fun, here it is. Use this and hopefully it was practical and useful to you.

If you have any further questions regarding this please feel free to email us pete@sellingto.co or if you’re ready to go further in your home buying journey - we would be happy to help!