Deposit and down payment are two terms that come up when buying a home in Canada. While they are often confused, they serve different purposes. A deposit is an upfront payment after accepting the offer to show your commitment. On the other hand, a down payment is the lump sum you pay at closing to reduce your mortgage. Knowing the difference can help you plan your finances and avoid unexpected costs during the purchase process.
Key Takeaways
- A deposit is paid during the offer stage, while a down payment is paid at closing.
- Deposits are usually held in trust and applied toward your down payment or closing funds.
- Minimum down payments in Canada start at 5% of the home’s purchase price.
- Down payments below 20% generally require mortgage default insurance.
- Builder deposits work differently from standard resale deposits.
- Deposit refunds depend on the purchase agreement and why the deal fell through.
What is a Deposit?
A deposit is the money you provide when making an offer on a home. It shows the seller you are serious about moving forward with the purchase and financially prepared to complete the deal. In competitive markets, a larger deposit may help strengthen your offer.
Once the seller accepts your offer, the deposit is held in trust by the seller’s brokerage until closing. In Ontario, brokerages that hold deposits must maintain trust accounts under the Trust in Real Estate Services Act (TRESA). Unlike a builder’s deposit, which may have specific installment schedules, a standard home purchase deposit is typically a single payment held in trust until closing.
If the sale doesn’t complete and you decide to walk away, the seller is not legally required to return the deposit unless the offer includes specific conditions. In that case, both parties sign a Termination and Mutual Release form to resolve the issue regarding the funds.
What is a Down Payment?
A down payment is a percentage of the home’s purchase price and the initial equity in the property, which affects both the amount you borrow and your mortgage payments. In Canada, the minimum down payment depends on the home’s purchase. For homes priced at $500,000 or less, the minimum is 5%. For homes between $500,000 and $1,499,999, buyers must contribute 5% on the first $500,000 and 10% on the remaining amount. Homes priced at $1.5 million or more require a minimum 20% down payment.
If your down payment is less than 20%, mortgage default insurance is generally required through CMHC, Sagen, or Canada Guaranty. The premium is usually added to your mortgage and varies based on the size of your down payment and loan-to-value ratio. A down payment calculator can help estimate how much you may need based on your target purchase price and available savings.
Understanding Down Payment vs Deposit When Buying a Home
The major differences between a home-buying deposit and a down payment are the amount and timing of payment.
| Deposit | Down Payment |
|---|---|
| No standard required amount. | Typically ranges from 5% to 20% of the home’s purchase price. |
| Paid along with the offer. | Paid on the closing day of the home purchase. |
| Held in trust by the seller’s brokerage. | Applied toward the mortgage at closing. |
| May not be refundable if the deal falls through. | Represents your initial equity in the property. |
Amount of Deposit vs. Down Payment in Canada
There is no minimum set for a deposit. The amount is typically negotiated between the buyer and seller, and your real estate agent can help determine what is reasonable based on the local market. A stronger deposit can make your offer more competitive, especially when there are multiple bids.
| Home Purchase Price | Minimum Down Payment |
|---|---|
| Below $500,000 | 5% |
| $500,000 – $1,499,999 | 5% on the first $500,000 and 10% on any amount above $500,000 |
| $1,500,000 or more | 20% |
A home’s purchase price determines the minimum down payment required in Canada. Still, lenders may also consider factors such as your credit history, income, and employment status when assessing your mortgage application.
As mentioned, your mortgage lender will also charge you a mortgage insurance premium if your down payment is below 20%. The amount of insurance you pay varies from 0.6% to 4.5% of your total mortgage amount. This is your lender’s way of covering their bases in case you fail to pay your mortgage in the future. Keep in mind that your lender will also appraise the home value before they decide how much they want to lend you to buy the house.
Canada has three mortgage default insurers in Canada. These include the Canada Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty. CMHC operates as a federal Crown corporation, while Sagen and Canada Guaranty operate privately.
Timing of Down Payment vs. Deposit
A deposit comes first in the home-buying process. It is usually submitted with an offer or shortly after acceptance and held in trust until the sale closes. After the sale closes, the deposit is applied toward the home’s purchase price and down payment or closing funds. Until then, the money is held in trust and released on closing day in accordance with the terms of the purchase agreement.
Builder Deposit vs. Down Payment
A builder deposit differs from both the standard real estate deposit and your down payment. A builder deposit is the money paid directly to a developer when you purchase a pre-construction or new build home. Unlike a standard resale deposit held in trust, builder deposits are often paid in installments set by the developer and are applied directly to financing construction.
For new construction homes, builders often require deposits in multiple stages:
- Initial deposit when signing the purchase agreement (typically 5–10% of the purchase price)
- Additional deposits at construction milestones (foundation completion, framing, etc.)
- Final payment before closing
The builder uses these funds to finance the construction process, whereas a standard real estate deposit demonstrates your commitment to a resale home purchase.
| Builder Deposit | Standard Deposit | Down Payment |
|---|---|---|
| Paid directly to the developer | Held in trust account | Paid to your lender at closing |
| Paid in installments | One-time payment | One-time payment |
| Demonstrates commitment and finances construction | Shows seller you’re serious | Reduces your mortgage amount |
| Non-refundable in many cases | Potentially refundable | Final payment to acquire property |
When using a down payment calculator for new construction, remember to include your builder deposits in your financial plan. While these deposits eventually form part of your down payment, you’ll need the funds available much earlier in the process.
How to Save for a Down Payment in Canada
Saving for a down payment is one of the biggest hurdles for first-time buyers, but Canada has programs specifically designed to help. Here are some of the most effective tools available:
- First Home Savings Account (FHSA): A registered account that lets eligible first-time buyers contribute up to $8,000 per year, with a lifetime maximum of $40,000. Contributions are tax-deductible, and qualifying withdrawals for a home purchase are tax-free.
- Home Buyers’ Plan (HBP): The Home Buyers’ Plan allows first-time buyers to withdraw up to $60,000 from their RRSP to use toward a qualifying home purchase without triggering tax.
- Tax-Free Savings Account (TFSA): A TFSA can also be used to grow your down payment savings. Contributions are not tax-deductible, but any investment growth and withdrawals are completely tax-free.
You can use these programs together, and a mortgage broker or financial advisor can help you decide which approach works best for your situation.
Common Mistakes First-Time Buyers Make with Deposits and Down Payments
Based on common issues REMAX agents see during the home-buying process, these are some of the most frequent mistakes first-time buyers make:
Confusing the Deposit with the Full Down Payment
Your deposit typically goes toward your down payment or closing funds, but you still need to have the remaining balance ready on closing day.
Not Having the Deposit Ready
Depending on the purchase agreement, the deposit may be due shortly after an offer is accepted. If your money is tied up in investments or non-liquid accounts, you may have trouble accessing the deposit on time.
Overlooking Closing Costs
Your budget should also account for expenses such as land transfer tax, legal fees, home inspections, title insurance, and moving costs.
Making Large Financial Changes Before Closing
Lenders review your financial information during the mortgage process. Large or unexplained deposits, withdrawals, or new debt may lead to additional questions or affect mortgage approval.
Frequently Asked Questions
What is the difference between a deposit and a down payment in Canada?
You pay a deposit with an offer or shortly after acceptance, and the brokerage holds the funds in trust until closing. You contribute a down payment toward the home’s purchase price on closing day. While the two serve different purposes, your deposit usually goes toward your down payment or closing funds once the sale closes.
Is a deposit refundable if you back out of a home purchase?
Not always. The purchase agreement determines whether you get the deposit back. If you walk away from a deal without legal grounds, the seller may claim it.
Does my deposit count toward my down payment?
Yes. Once the sale closes, the brokerage releases the deposit from the trust and applies it toward your down payment or closing costs. You do not pay both amounts separately. Your deposit forms part of the total amount required to complete the purchase.
Ready to Buy?
Understanding the difference between a deposit and a down payment is a step in preparing for your home purchase. Based on REMAX Canada’s experience working with home buyers across the country, confusion around deposits, down payments, and closing costs remains one of the most common challenges during the buying process. A local REMAX agent can walk you through the offer process, help you plan your upfront costs, and connect you with the right mortgage professionals for your situation.
