Security Deposit vs Down Payment on a House

The deposit is what you pay when your offer is accepted, showing the seller you’re serious. The down payment, on the other hand, is the portion of the home’s price that you cover upfront, with the rest being financed through a mortgage.

Whether you’re purchasing an existing home or a pre-construction property, understanding the role of these payments can help you plan your finances more effectively.

In this guide, we’ll break down exactly how these payments work for both existing homes and pre-construction properties, and how they affect your overall home purchase. We’ll also cover mortgage loan insurance, how it impacts your costs, and what you can do to save money in the long run.

What Is a Down Payment?

A down payment is the amount of money you contribute upfront toward the purchase price of a home. The rest is covered by a mortgage from your lender.

How Much Do You Need for a Down Payment?

The required down payment depends on the price of the home:

Purchase Price of HomeMinimum Down Payment Required
$500,000 or less 5% of the purchase price
$500,001 to $1,500,000 5% on the first $500,000 + 10% on the portion above $500,000
$1,500,001 or more 20% of the purchase price

Note: If you’re self-employed or have a lower credit score, lenders may require a larger down payment.

Mortgage Loan Insurance: When and Why It’s Required

If your down payment is less than 20%, you must get mortgage loan insurance. This protects the lender in case you can’t make your payments.

There are three main mortgage insurers in Canada:

  • Canada Mortgage and Housing Corporation (CMHC) (government-backed)
  • Sagen (private insurer)
  • Canada Guaranty (private insurer)

How Much Does Mortgage Loan Insurance Cost?

The cost of mortgage insurance depends on how much you borrow. The smaller your down payment, the higher your premium.

Loan-to-Value Ratio (LTV)Mortgage Insurance Premium
95% (5% down payment) 4.00% of mortgage amount
90% (10% down payment) 3.10% of mortgage amount
85% (15% down payment) 2.80% of mortgage amount
80% (20% down payment) No insurance required

The insurance premium can be added to your mortgage, but keep in mind that you’ll pay interest on it if you do.

How a Larger Down Payment Saves You Money

A bigger down payment means borrowing less, which lowers your overall mortgage cost. Here’s an example, purchase price $500,000.00:

Down Payment Amount Mortgage Amount Total Mortgage Loan Insurance Premium Total Cost Over 25 Years (Assuming 5% Interest)
5% ($25,000) $475,000 $19,000 $833,153
10% ($50,000) $450,000 $13,950 $789,659
20% ($100,000) $400,000 $0 $698,944

As you can see, a larger down payment reduces both your mortgage insurance costs and the total amount you pay over time.

Where Can Down Payments Come From?

You’ll need to show your lender where your down payment is coming from. Acceptable sources include:

  • Personal savings (bank accounts, investments)
  • Proceeds from selling an existing home
  • Non-repayable gifts from immediate family members
  • RRSP withdrawals (up to $35,000 through the Home Buyers’ Plan)

What Is a Deposit?

A deposit is a payment made when your offer is accepted. It shows the seller that you’re serious about buying the home.

How Much Is a Deposit?

Deposit amounts vary depending on market conditions:

  • Balanced markets: 2% to 5% of the purchase price
  • Competitive markets: 5% to 10% or more to strengthen your offer

The deposit is later applied toward your down payment and closing costs.

What Happens If You Back Out?

If you walk away from the deal without a valid reason (e.g., financing fell through), the seller may keep your deposit as compensation.

Deposits and Down Payments for Pre-Construction Homes and Condos

If you’re buying a pre-construction home or condo, expect to pay a larger deposit. Builders use these funds to finance the construction.

Pre-Construction Condos

  • Deposits typically range from 15% to 25%, paid in installments over several months or years.

Pre-Construction Homes

  • Deposits usually range from 10% to 20% but are paid over a shorter period than condos.

Important Note for Pre-Construction Buyers: Even if you’ve paid 20% in deposits, you still need to qualify for a mortgage when the home is built.

Key Differences: Down Payment vs. Deposit

Feature Down Payment Deposit
Purpose Helps secure a mortgage Shows commitment to purchase
When Paid At closing When offer is accepted (or shortly after)
Amount 5%–20%+ of the purchase price Typically 2%–10%, varies by market
Where It Goes Applied to home purchase Held in trust until closing
Refundable? No, once paid to the seller Yes, if a valid condition (e.g., financing) is not met

Final Thoughts

Understanding the difference between a deposit and a down payment can help you budget for your home purchase and avoid surprises.

  • Deposits secure the deal and are generally higher for pre-construction homes and condos.
  • Down payments determine mortgage eligibility and insurance requirements.
  • Mortgage insurance applies when the down payment is less than 20%, increasing borrowing costs.
  • Non-residents in Ontario, B.C., and Quebec must provide a 35% down payment.

Taking the time to plan for both can make your home-buying experience smoother and more affordable. If you have questions, speak with a real estate agent or mortgage professional to get personalized advice.

Source: https://www.canada.ca/en/financial-consumer-agency/services/mortgages/down-payment.html

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