Or: Everything you wanted to know about deposits but were afraid to ask.

One of the most common questions we get when preparing for an offer is about the deposit. We’ve written before about where your deposit goes once you hand over that bank draft to you your agent (it goes in a trust account) but today, dear buyer, we are going to lay out the basics.

When offering on a property there’s a line on the the Agreement of Purchase and Sale for “Deposit.” In other parts of Ontario a few thousand bucks is normal or the listing itself will tell your agent how much of a deposit to include. Here in Toronto it’s a bit different. Listings don’t state how much is expected and deposits are significantly higher – closer to 5% is pretty normal.

Your deposit is referred to as “consideration” and makes the contract binding. To put that in plain language, it’s collateral. You’re putting up a certain amount of money, ideally an amount that you don’t want to walk away from, as collateral that you will indeed go through with the purchase when the time comes to close.

So, does your deposit go towards the down payment on your mortgage? Yes!

Your mortgage broker told you that you needed a minimum of 5% down, which is true, but the other way to look at it is the lender is only willing to finance up to 95% of the price of the home. You are paying for that last 5%. If you give that 5% as your deposit, then there you go, you’ve covered your side of it.

For example:
You’re approved for a mortgage of $600,000 with a $150,000 down payment.

Your Dream House = $750,000
Down Payment = $150,000
Deposit = $50,000
Remainder of Down Payment = $100,000

Your Mortgage + Deposit + Remainder of Down Payment = Your Dream House
$600,000 + $50,000 + $100,000 = $750,000

Since the seller already has $50,000 of your down payment as the deposit you are just making up the difference. It’s not in addition to.

Phew, right?

If you have a question about the buying and selling process feel free to ask. We’ve probably heard it before, and even asked it ourselves at one point.