BC Sunshine Coast real estate by Menno at Royal lePage Real estate on the BC Sunshine Coast

In real estate, we tend to use a deposit to show “good faith” when making an offer to purchase. The deposit money is held in trust by us. The amount will show up again on the closing statement of adjustments; it gets credited to the purchase price.

At a car dealership, you may pay a deposit to the dealer to hold the deal and a down-payment to help pay down the car loan. It's the same difference in real estate.

It’s tough to quickly and clearly describe the difference between a deposit and a down-payment. Is there even a difference?

The down payment amount, in real estate, is the amount that you do not borrow to make the purchase. If you buy the house for $200,000 and you need to borrow $150,000 then your down payment would be $50,000.

It can happen that the deposit you paid, will become part of the down payment. Imagine the deposit was $10,000 in the above example, then you have to supplement $40,000 to come to the full down payment amount. In a situation where a buyer pays for a home out-right (no financing needed), the entire purchase price is the “down payment”, however we don’t call it that because there is no mortgage loan.

With money pouring out of your wallet at a high rate, it's no surprise that it's hard to tell the difference between a deposit and a down-payment.

NOT JUST IN REAL ESTATE

The same distinctions apply when purchasing other items of substantial value, such as a car. You pay the dealer a certain amount of money as a deposit to make sure you are going to go through with the deal. When you come to pick up the car, you pay the rest of the down payment and the car finance company covers the rest (car loan).

Home buyers like to make as large a down payment as possible, meaning less interest to be paid later on, easier refinancing, smaller monthly payments, lower mortgage insurance fees, and a bigger equity buffer if home prices slide.

How you go about saving a sizable deposit – when savings interest rates hover around the one percent mark – is a different story. The stock market hasn’t been giving good returns either. That’s why some buyers would rather take the keys to their new home faster. This is where the balancing act begins … do you want higher payments and get into that desired home faster?

What's the minimum down-payment required - is a frequently asked question in the field of real estate. But it's not quite THAT simple, there may be closing costs as well.

THE MINIMUM DOWN PAYMENT REQUIRMENT

It takes time to save up a down payment, even if one goes for the absolute minimum legal requirement for a down payment, currently set at 5 per cent. There is 100 per cent financing around, offered as cash-back down payment mortgages – these are very expensive however. Also, they are expected to become unavailable fairly soon.

For today’s highly leveraged consumer, saving a down payment isn’t as easy as it was thirty years ago when personal savings rates exceeded 20 per cent. Also, the average home purchase price has gone up over the years. How long does it take young people to scrape together Tens of Thousands of Dollars?

This is not meant to discourage saving for a down payment. Saving up a larger down payment gives you a safety cushion if home prices tumble (and you really need to sell). The last thing anyone wants is to owe more than their home is worth.

You're all set when house prices go up. After making your down-payment, your equity increases each time the market value of the property goes up - which it normally does.

WHEN HOUSE PRICES GO UP

The opposite can happen too; house prices could go up even more. That would make it even more difficult to get into the market. If you knew those things ahead of time, the decision could be easy. When the market goes up, it’s pretty hard to earn enough to compensate for the house price increase. Buying today also lets you lock in abnormally low fixed mortgage rates for up to a decade; who knows what mortgage rates might be like in five to ten years.

A principle remains: everybody’s got to live somewhere, now and later. Both renting and owning a home are major life expenses. Which choice is better?

As a possible buyer, you’ve got many things to consider, including:

• Your rental costs. (Are they higher or lower than the potential ownership costs?)

• Alternative uses for down payment funds. (Is there a better return by investing down payment funds elsewhere?)

• The size of your emergency fund. (Home ownership comes with a long list of unexpected expenses.)

• Your economic stability and future earning power.

How do you raise money efficiently? The traditionally tried and tested method for acquiring wealth is to live frugally and increase your sources of income. How simple!

NEEDING A LARGER DOWN PAYMENT?

• Most obviously: Cutting spending, which is much easier with a goal like home ownership.

• Gifts from parents get a lot of young people started as home owners.

• One could borrow from an RRSP under the Home Buyers Plan.

• Specifically: apply all tax refunds and bonuses; get rid of one car, postpone a holiday a bit longer.

• Use municipal and provincial home buyer grants when applicable

Everybody must pay some sort of shelter cost, either in the form of a mortgage or rent. As long as you have a clear picture of your finances, then a decision to buy a home sooner often makes sense.

Are you envious of those that can plunk 20% down on their home purchase? No need, on your second or third property transaction, you may well also be in that position.

HOW DO YOU ACHIEVE “20 PERCENT DOWN”?

It would be great to have 20 per cent down. But simple math shows that a 20 per cent down payment could take some people over a decade to accumulate. The reality is, waiting that long is not in the game plan for most young people. Apart from that fact, real estate prices could go up during that time period.

Buyers with 20 per cent down, however, are not uncommon. These are usually people that aren’t purchasing their first home. By selling their first home (which has gone up in value), they manage to secure cool crisp cash to be put towards their next purchase. A few hops further, even larger down payments are possible – up to the most desirable of all: the purchase that’s all-cash (no mortgage needed).

Mortgage financing - such a tough and difficult topic to completely understand. Here are some links to blog articles about mortgages - you may enjoy them.

MORE blog articles about mortgage financing and related topics can be found here:

Banks making predictions: http://www.mennorealty.ca/Blog.php/banks-are-saying-again

Most recent market stats: http://www.mennorealty.ca/Blog.php/november-2012

The for ever changing market: http://www.mennorealty.ca/Blog.php/changing-market

Mortgage specialist or banker? http://www.mennorealty.ca/Blog.php/mortgage-banker