What You Need to Know About Deposits When Purchasing a Home in Ontario
Are you a first-time home buyer or have not purchased a home in a while? Maybe you need a refresher or a quick read-up on how house deposits work. Read this article to answer your questions about deposits.
WHAT IS THE DEPOSIT ON A HOME?
When submitting an offer on a home (House, Townhouse, Condo, or whatever you a buying), you will need to make a deposit payment upfront, usually, this needs to be submitted within 24 hours of your offer being accepted. This is very different from your down payment on the home. The amount of a deposit may vary depending on the home you’re purchasing and it is negotiable.
THE DEPOSIT VS. THE DOWN PAYMENT
When your offer is accepted by the seller of a home, you will be required to pay a deposit to the seller’s real estate brokerage in trust. ‘In trust’ means the brokerage maintains a trust bank account which ensures the money is safe and secure. The deposit signals to the seller that you’re serious about purchasing the home and that this money will be held in trust by their real estate brokerage and eventually applied to the sale price of the home. The deposit is not and should not be paid directly to the seller.
The down payment is an amount the lender or bank requires you to pay by the closing date of your purchase if you’re getting a mortgage. This is paid to your lender (e.g., the bank) and is applied to the purchase price, reducing the overall amount you are borrowing as a mortgage.
Banks rarely—if ever provide a mortgage for the full amount of the home—you need to provide a down payment to them first. A down payment is typically between 5% - 20%.
WHEN DO I NEED TO PAY THE DEPOSIT?
Typically, when you submit an offer on a home, it's customary to agree to pay the deposit within 24 hours following acceptance by the sellers. However, some real estate brokerages may require that you include the deposit with your offer, or herewithin.
It's important to note that even if your offer is conditional, such as contingent on financing or inspection, you're still obligated to pay the deposit. If your purchase doesn't proceed due to conditions not being fulfilled, you'll sign a Mutual Release agreement, and your deposit will be refunded back to you.
HOW CAN I SUBMIT THE DEPOSIT ON THE HOME I AM PURCHASING?
The seller’s REALTOR® will provide your agent with deposit instructions. They will go over the various options for they accept deposits. Below I outline the main options, but there may come across other options.
EFT, wire transfer or direct deposit
Some brokerages prefer that all deposits be paid electronically. For instance buyers can submit payment by Electronic Funds Transfer (EFT), Wire Transfer, or even through direct deposit into the brokerage’s account.
Bank drafts, certified cheques or email transfer
Depending on the amount, other brokerages still accept bank drafts, certified cheques or instalments via email transfer.
Never pay a deposit directly to the seller
Pro Tip! Never pay a deposit directly to the seller. The money is better protected when it is in the real estate brokerage’s trust account and is covered by actual legislation. Alternatively, the seller’s lawyer may also hold the deposit in trust. If the deposit was paid directly to the seller, they could take that money and spend it, and the buyer would have little recourse.
WHAT HAPPENS AFTER I SUBMIT MY DEPOSIT?
After you submit your deposit, the seller’s real estate brokerage will provide you with an official receipt. This receipt will let you rest assured that they’ve received the funds. The money will be held in the trust until the house closes and the money will be applied to the purchase price of your home.
HOW MUCH IS THE DEPOSIT THAT I NEED TO PAY?
Every listing is different so the amount of the deposit you have to pay may vary. You may see listings that request a $10,000 deposit, and you may see others requesting a $40,000 deposit. This varies from case to case but your REALTOR® should be able to help direct you and offer you guidance.
Remember, this deposit can be negotiated as part of your offer just like the purchase price. Keep in mind the seller will want a large deposit payment while you probably would rather pay a smaller deposit up front and make it easier on your wallet. The amount of the deposit only really comes into play if the house ends up not closing.
WHAT HAPPENS TO THE DEPOSIT IF THE HOUSE DOESN’T CLOSE?
When a house doesn’t end up closing it doesn’t automatically mean the seller gets to keep the buyer’s deposit payment. That’s often a misconception. Likewise, the buyer doesn’t get their deposit returned immediately if it’s the seller’s fault for the home not closing.
In fact, the deposit will only be released if a Mutual Release is signed by both parties. In a worst-case scenario this may end up in front of a judge and be decided by a court order.
WHAT HAPPENS IF I DON’T PAY THE DEPOSIT?
Typically deposits are requires to be paid within 24 hours/one banking day. Saturdays, Sundays and bank holidays don’t count. This can be negotiated on the agreement of sale, if more time is needed.
THE DEPOSIT IS LATE, NOW WHAT?
If a buyer pays a deposit late then the seller does have the option to cancel the deal – so that’s why it’s important for you to make sure you get your deposit paid in a timely fashion. You don’t want you to lose out on your purchase because of a late deposit payment.
CAN I (AS A BUYER) BACK OUT OF A DEAL BY NOT PAYING THE DEPOSIT?
Once your offer has been accepted by the seller, there’s no backing out. You have committed. The payment of the deposit on the home is a legal contract to purchase their home.
CAN THE SELLER CAN CANCEL THE DEAL?
Even though it’s a legal contract, the seller can cancel the deal if you don’t pay the deposit. Remember though, not paying would also open you up to legal ramifications and you could be taken to court and sued. It’s definitely not a situation you want to end up in.
