Buying a home is a significant milestone in one’s life, and for many, it’s a dream come true. If you’re planning on purchasing a home in the near future, there will be a number of important costs to prepare for, including your deposit and down payment.
Not only are both of these costs significant, but they can also vary based on your personal circumstances. Before you head to the market, you’ll want to know how they work and how much you should save for each.
Deposit vs. Down Payment
Your deposit is the initial sum of money you provide when you make an offer to purchase. It demonstrates your seriousness as a buyer and shows the seller that you have the financial capacity to follow through with the purchase.
When your offer is conditionally accepted, your deposit is held in trust until the closing date and is credited towards the total down payment.
Your down payment, on the other hand, is the lump sum amount you pay toward the purchase price of the home. It is typically a percentage of the total price and is paid on the closing date when you take ownership of the property.
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How Much Should You Budget For a Deposit?
In Ontario, the deposit you’ll need to make when submitting an offer on a home can vary, but it typically ranges from 3% to 5% of the purchase price. Keep in mind that offering a higher deposit can make your offer more attractive to sellers, as it shows your commitment.
All that said, your estimated deposit amount will ultimately reflect what your overall financial power is. The greater your home-buying budget is, the larger your deposit amount will be.
For instance, If you’re looking to buy a home in Ontario for $1,000,000, a common deposit might be 5%, which amounts to $50,000. This is only an example and it’s essential to work closely with your real estate agent to determine an appropriate deposit amount when making an offer.
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Unpacking Your Down Payment
For many years, the standard down payment on a home in Ontario was 20% of the total purchase price. However, as housing costs have climbed over the past couple of decades, this number has become more dynamic. In today’s market, your minimum down payment will depend on the cost of your home altogether.
In Ontario, properties that are less than $500,000 require a minimum down payment of just 5%. Homes that are above this number but below the $1,000,000 mark will require a minimum down payment of 5% of the first $500,000 of the purchase price and 10% of the remaining amount. Finally, the down payment on homes that cost more than $1,000,000 is 20%.
Just like your deposit, the total amount you’ll need to save for your down payment will be reflective of your buying budget.
Remember, your deposit will make up a portion of your down payment. So if your deposit amount is 5% and your down payment is 20%, your total between these two costs will still be 20% as opposed to 25%.
Do You Need Mortgage Insurance?
If you purchase a home for less than $1,000,000 and your down payment is less than 20% of the purchase price, you’ll also be required to purchase CMHC mortgage insurance. This insurance protects the lender in case you default on your mortgage.
With a rough idea of what your upfront buying costs are, it’s important to have your resources ready to go when you head to the market. If you wait too long to get your finances in order, you could miss out on your dream home.
When making an offer, your deposit will either be due on the spot or within 24 hours. If you have money tied up in other areas like an RRSP or stocks, you might not be able to access it in time. Be sure to have your deposit available in a liquid bank account before beginning your home search.
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