Almost everyone has heard of a down payment when buying a house, but do you know about deposits? Many people confuse the two, but they’re very different! Here’s everything you need to know about home deposits.
What Is a Home Deposit?
When you make an offer on a home you want to buy, you are required to provide a security deposit. This shows the seller that you’re serious about buying the home.
The higher the deposit, the more serious an offer can be perceived. Often if two offers are the same, the higher deposit will get the home.
-Even if you back out of a deal without a deposit, you’re still on the hook for any damages to the seller. A deposit is often seen as a way to keep you accountable for following through.
How Much Is a Deposit?
Different areas in Canada have different standards for what they expect in terms of size of the deposit. It’s important to speak with a local REALTOR to find out what the expectations are.
In some areas it can be as low as $500. In other areas, the expected deposit amount can be as high as 10%, depending on area, the market and the purchase price.
When is the deposit on the home due?
It’s important that you’re ready to provide a deposit when you start writing offers. Not having a deposit in hand, can affect your offer’s acceptance.
Some offers are written that you have within 24 hours of an accepted offer to submit the deposit or you will be in breach of contract, even if it's accepted conditionally. Best practice is to provide your deposit at the time of offer to deal your deal.
If you breach the contract, the seller can resell the property to someone else and potentially sue you for damages, including the difference in sale price if they sell it for less.
Who Do I Pay the Deposit To?
Your deposit doesn’t immediately go to the seller. If you are the successful bidder on the property, your deposit will be held in trust by the deposit holder. The deposit holder is generally the Seller's or the Buyers real estate brokerage, depending on the province. It’s released to the seller on closing day when the home officially becomes yours.
Deposits are usually made in the form of certified cheques, bank drafts, or money orders. Submitting an offer with a cheque that has not been certified, could reduce the chances of your offer being accepted.
When the sale closes, the deposit goes towards the total purchase price of the property and becomes part of your down payment. However, if a sale doesn’t go through, it is possible to lose your deposit.
If you choose to back out without having placed conditions prior to making the offer, not only could you likely lose your deposit, you could also face a potential lawsuit for any damages suffered by the seller.
Rest assured, they will not just take your money and run. Nor is it easy for them to do so. Regulatory bodies take brokerage trust accounts very seriously and do regular audits. If they find any irregularities, they’ll potentially shut a brokerage down and revoke their license.
What if my money is tied up in investments or my current home's equity?
This is common. Even those who have the money for the initial deposit sometimes run into the issue of the funds not being readily available and some prefer to keep the funds invested. If you find that perfect home and want to make an offer quickly, you aren’t always able to get the right amount of home deposit money together in time to make a competitive offer or to avoid being in breach of contract.
Deposit Rocket makes your life a lot easier. Often in 5 minutes or less, we can provide a bond, insured by an A-rated insurer, in lieu of a cash deposit that carries the same legal weight as a certified cheque. The cost is reasonable, which you can calculate by using our fee calculator and it’s accepted by all licensed realtors.
It is important to be informed about the home deposit process when buying a home in Canada. If left to the last minute, it can lead to disappointment with a less than ideal offer, and by not being the winning bidder... That’s one of the things we’re trying to help solve here at Deposit Rocket.
If you have any questions do not hesitate to reach out.