Understanding Down Payments and Deposits: What Every Homebuyer Needs to Know

Buying a home is one of the biggest financial steps you'll ever take, and navigating the process can feel overwhelming. If you’re securing a mortgage, you’ll hear about down payments—but your REALTOR® will also mention a deposit.

Are these two the same thing? Not quite. Let’s break down the difference between a deposit and a down payment, how they work together, and what you need to know to make confident financial decisions. Whether you’re a first-time buyer or an experienced homeowner, this guide will help you better understand the role each plays in your home purchase.

What is a Down Payment?

A down payment is the portion of the home’s purchase price that you pay upfront, separate from your mortgage loan. It can come from various sources, including:

• Personal savings
• Investments
• A financial gift from family*
• Borrowed funds**

Important Notes:

• If using a financial gift, your lender will require a formal gift letter. The money should be deposited into your account before being used for a down payment or deposit.
• Some lenders allow borrowing against a personal line of credit or other properties, but this varies.

How Much Do You Need for a Down Payment?

In Canada, most lenders require at least a 20% down payment to avoid mortgage default insurance. However, for insured mortgages, you may qualify with as little as 5% down. Keep in mind that lenders also expect buyers to have an additional 1.5% of the purchase price saved to cover closing costs like:

• Legal fees
• Appraisal fees
• Home inspections
• Title insurance

What is a Deposit?

A deposit is not the same as a down payment, but it plays a crucial role in securing your home purchase. When making an offer, a deposit demonstrates to the seller that you are serious about the transaction. If you back out of the deal, the seller may be entitled to keep the deposit as compensation.

Does My Deposit Count Toward My Down Payment?

Yes! The deposit is part of your overall down payment. However, lenders require a 90-day financial history to verify the deposit’s source. They will need bank statements showing:

• The deposit leaving your account
• The selling brokerage receiving the deposit

This verification helps prevent fraudulent transactions and ensures compliance with financial regulations.

How Does the Deposit Work in the Home Purchase Process?

Once the deal is finalized, your lawyer will retrieve the deposit from the seller’s brokerage and apply it toward your total down payment when closing the transaction.

Real-Life Scenarios: How Down Payments and Deposits Work

Scenario 1: Ideal Camille

Camille is purchasing a $400,000 home. She has saved $80,000 for her 20% down payment and provides her lender with a 90-day transaction history. To strengthen her offer, she includes a $20,000 deposit with her purchase agreement.

After the seller accepts her offer, Camille transfers the deposit to the selling brokerage and provides her lender with a receipt confirming the funds were received. This ensures her lender recognizes that $20,000 of her total $80,000 down payment has already been accounted for.

Scenario 2: Gift Cliff

Cliff is buying a $300,000 home but only has $15,000 saved, which his father gifted him for his 5% down payment. Since this is an insured mortgage, he includes the full $15,000 as his deposit.

Once his offer is accepted, the deposit is transferred to the seller’s brokerage. Cliff informs his lender that the deposit represents his full down payment and was a gift from his father. The lender then requests a gift letter verifying the source of funds.

Pro Tips for Down Payments and Deposits

1. Understand lender policies on gifted or borrowed funds. Some lenders accept gifts from non-family members, while others only allow direct relatives to contribute.

2. Maintain a clear 90-day financial history. Lenders closely monitor transactions to ensure funds are legitimate. Be prepared to provide detailed records.

3. Avoid unnecessary account transfers. Large, unexplained deposits or withdrawals can trigger red flags. Keep your down payment funds in a designated account to streamline approval.

4. Comply with anti-money laundering regulations. Canada has strict financial tracking laws, so ensure all money movements are well-documented to avoid delays in your home purchase.

Final Thoughts

Understanding the difference between a down payment and a deposit is essential for a smooth home-buying experience. While both contribute to securing your home, they serve different purposes in the transaction.

If you have questions about your home financing options, consult a mortgage broker or real estate expert to ensure you’re on the right track. Ready to start your homeownership journey? Let’s make it happen!