If you’re planning to buy a home in Canada, you’ll need to save up some money for two important payments: the deposit and the down payment. But what’s the difference between these two terms, and how much do you need to pay for each? Let’s look at a deposit vs down payment, how they affect your home purchase, and some tips on how to save for them.
What is a deposit?
A deposit is a sum of money that you pay upfront when you make an offer to buy a home. It shows the seller that you’re serious about the purchase and that you have the financial means to buy the home. The deposit is usually at least 5% of the purchase price of the home, but it can be higher depending on the market conditions and the seller’s preferences. It is part of your down payment, so you don’t have to pay it twice.
The deposit is usually paid by a certified cheque, bank draft, or money order, and it’s held in trust by the seller’s real estate brokerage until the deal closes. If the deal goes through, the deposit is applied towards the purchase price of the home. If the deal falls through, you may or may not get your deposit back, depending on the conditions of the offer and the reason for the cancellation. For example, if you include a “subject to financing” condition in your offer and your mortgage is not approved, you can get your deposit back. But if you back out of the deal for no valid reason, you may lose your deposit to the seller.
What is a down payment?
A down payment is the amount of money that you pay towards the purchase price of the home, while the rest is covered by a mortgage loan. The down payment is usually expressed as a percentage of the purchase price. In Canada, the minimum down payment is 5% for homes under $500,000, and 10% for the portion of the price above $500,000. For example, if you buy a home for $600,000, you’ll need a minimum down payment of $35,000 (5% of $500,000 plus 10% of $100,000).
However, if you can afford to pay more than the minimum, you may want to do so for several reasons. First, a larger down payment reduces the amount of money you need to borrow, which means lower monthly mortgage payments and less interest over time. Second, a larger down payment may help you qualify for a better mortgage rate, as lenders consider you less risky. Third, a larger down payment may help you avoid paying for mortgage default insurance, which is mandatory for mortgages with less than 20% down payment. Mortgage default insurance protects the lender in case you default on your loan, but it adds to your overall cost of borrowing.
How to save for a deposit and a down payment?
Saving for a deposit and a down payment can be challenging, especially in today’s competitive and expensive housing market. However, there are some strategies that can help you reach your goal faster and easier. Here are some tips to consider:
Start saving as early as possible. The sooner you start saving, the more time you have to accumulate money and take advantage of compound interest. You can use a savings account, a tax-free savings account (TFSA), or a registered retirement savings plan (RRSP) to save for your home purchase. Each option has its own advantages and disadvantages, so you may want to consult a financial advisor to find the best one for you.
Budgeting
Set a realistic budget and stick to it. To save more money, you need to spend less than you earn. This means you need to know how to make a budget that tracks your income and expenses, and identifies areas where you can cut costs and save more. For example, you can reduce your discretionary spending on things like eating out, entertainment, and travel, and put the extra money towards your home savings. You can also look for ways to increase your income, such as taking on a side hustle, selling unwanted items, or asking for a raise.
Take advantage of government programs and incentives. The Canadian government offers several programs and incentives to help first-time home buyers save for their home purchase. For example, the Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from your RRSP to buy or build a home, without paying tax on the withdrawal. The First-Time Home Buyer Incentive (FTHBI) offers a shared-equity mortgage with the government, where you can borrow up to 10% of the purchase price of a new home or 5% of a resale home, and lower your monthly mortgage payments. The First-Time Home Buyer Tax Credit (HBTC) gives you a tax credit of up to $750 for buying your first home. You can learn more about these programs and see if you qualify on the Canada.ca website.
Deposit vs. Down Payment
Buying a home is a big financial decision that requires careful planning and saving. By understanding the difference of deposit vs down payment, and following some of the tips above, you can make your home buying journey easier and more rewarding. If you need more help or advice, feel free to contact us. We’ll be happy to assist you with your home buying needs.