Area of Law: Real Estate Law
Answer # 397
The depositRegion: Ontario Answer # 397
Deposits and down payments
When an offer to purchase is made, the purchaser usually gives the seller a deposit toward the purchase price. The deposit assures the seller that the purchaser is serious about the purchase and intends to complete the deal if the offer is accepted.
The term “deposit” should not be confused with the term “down payment ” as they are not the same thing. A down payment includes the amount paid as a deposit. A down payment is the total of all the money paid by the purchaser up-to the value of the mortgage. Together, a down payment and the mortgage amount will equal the purchase price. Usually, the deposit is paid by the purchaser at the time the offer is made. The remaining amount of the down payment and the mortgage amount are paid to the seller on closing.
Deposits for re-sale properties
Deposits for re-sale properties can be in any amount, although deposits from 2% to 10% of the purchase price are typical. An offer with a higher deposit may be viewed as more attractive by a seller than one with a small deposit.
Although the deposit will be credited to the purchase price and deducted from the amount due on closing, it is not normally paid directly to the seller. In most cases, deposits are made payable to the listing agent “in trust.” This will require the listing agent to keep the money in a trust account until the closing date. Once the deposit has been credited to the purchase price on closing, the seller will usually authorize the agent to deduct their sales commission from the deposit.
Deposits for new homes
For new homes, the deposit is usually payable directly to the builder, and held “in trust” by the builder’s lawyer. Builders who are selling “pre-construction” homes may also require higher deposits than normally paid for re-sale properties. This allows the builder to use the money toward ongoing construction costs.
Deposit Protection – Ontario New Home Warranties Plan
Because of the risk that the buyer may lose the deposit, the Ontario government, through the Ministry of Government and Consumer Services, has empowered the agency Tarion to administer and enforce the Ontario New Home Warranties Plan Act.
The New Home Warranties Plan insures deposits of up-to $40,000 on new homes where the agreement of purchase and sale was signed before January 1, 2018. For agreements signed on or after January 1, 2018 coverage depends on the price of the new home, and is as follows:
- up-to $60,000 for homes sold for $600,000 or less;
- 10% of purchase price (to a maximum of $100,000) for homes sold for over $600,000.
Deposits paid for condominium units are protected by Tarion up-to a maximum of $20,000.
As of January 2018, deposit protection was expanded and now includes other payments, such as deposits for upgrades or extras, for buyers of both freehold homes and condominiums.
If the builder fails to complete construction of your home and files for bankruptcy, you can make a claim against the Plan to recover your deposit. Since the deposit protection is limited for new homes, purchasers should be cautious about giving a higher deposit and may decide to make any excess deposit over the limit payable to the seller’s lawyer in trust.
For more information about deposits and deposit protection, speak with your real estate agent or lawyer, or contact Tarion at tarion.com.
If you are buying a home and want to know how much of a mortgage you qualify for, use the Scotiabank mortgage calculator .
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