Understanding Real Estate Deposits in Ontario
Navigating real estate deposits in Ontario is essential for both buyers and sellers. This guide breaks down key details, from deposit amounts and timing to secure payment methods and handling procedures, ensuring a smoother transaction and greater peace of mind.
Understanding Real Estate Deposits in Ontario: What Every Buyer and Seller Needs to Know
Buying or selling a home is one of the biggest financial transactions most people will ever make. It's like the Super Bowl of adulting, with high stakes, big plays, and the thrill of victory (along with the agony of paperwork). And with those stakes come a lot of moving parts, one of the most important being the real estate deposit.
But what exactly is a deposit, and what are the rules surrounding it in Ontario? Think of the deposit as the handshake that seals the deal, a sign of commitment that tells the seller you're not just window shopping. It shows that you're serious, invested, and won't ghost the seller when things get real.
This guide will walk you through everything you need to know, from real estate deposit rules to handling deposits and ensuring a smooth transaction in the Greater Toronto Area (GTA) and beyond. So, whether you're a first-time buyer or new to the Ontario market, buckle up – there's a lot to learn!
What is a Real Estate Deposit?
Case Study: iPro Realty
In Ontario, deposits are generally held in trust by the real estate brokerage when working with a registered salesperson or broker. This ensures not only that the funds remain secure until the transaction closes but also protected under the Real Estate Council of Ontario (RECO) deposit insurance program. This practice is crucial as trust accounts are regulated to protect both the buyer and seller, ensuring a transparent transaction.
Deposit vs. Down Payment: What's the Difference?
It's easy to confuse the deposit with the down payment, but they serve different purposes. The deposit is the initial good-faith payment made to secure the transaction, while the down payment is the total amount you contribute toward the purchase price at closing, with the balance typically covered by your mortgage.
In Ontario, the deposit counts toward the down payment. For example, if you're planning a 20% down payment on a home and have already paid a 5% deposit, you'll owe the remaining 15% at closing.
How Much is a Deposit on a House in Ontario?
There is no fixed deposit amount in Ontario, however, the deposit amount in Ontario usually ranges between 5% and 10% of the purchase price. For instance, if you're purchasing a $1 million home in the GTA, a deposit of $50,000 to $100,000 would be standard. However, the specific amount may vary based on market conditions.
Bidding Wars and Multiple Offer Scenarios:Bidding Wars and Multiple Offer Scenarios: In competitive markets, a larger deposit can serve as a powerful negotiation tool to make your offer more appealing. Sellers are more likely to consider a subject-free offer with a higher deposit as a sign of serious intent, especially when multiple offers are on the table.
Financial Risk: While a larger deposit can strengthen your offer, buyers should balance this with their financial risk tolerance. A higher deposit means more money is at stake if the buyer defaults on the agreement.
Choosing the right deposit amount is crucial, especially in the GTA, where competition is fierce, and sellers are looking for secure transactions. Working with a knowledgeable real estate agent can help you determine an appropriate deposit that reflects your commitment without putting undue financial pressure on yourself.
Understanding the Deposit Section in an Agreement of Purchase and Sale
The deposit section in your Agreement of Purchase and Sale outlines five key components:
1. Purchase Price – The agreed property price.
2. Deposit Timing – When the deposit is due (herewith, upon acceptance, or as specified).
3. Deposit Amount – Exact deposit figure agreed upon.
4. Payable To – Name of the brokerage or lawyer holding the deposit in trust.
5. Handling Terms – Details on deposit management and timing upon acceptance.Deposit . Refundability court order is issued
Why is the Deposit Important for Sellers?
For sellers, the deposit serves as a security measure that provides peace of mind. A buyer who submits a large deposit demonstrates a strong commitment to the deal. This good-faith money acts as a safeguard, ensuring that the seller won't be left in the lurch if the buyer backs out without a valid reason. If this happens, the seller often has the right to keep the deposit as compensation for any damages or lost time.
In competitive markets, having your deposit ready and submitting it with your offer can make you stand out above the competition.
Timing of Deposit Payment
When you're ready to submit an offer on a property in Ontario, timing is everything, especially when it comes to the deposit. In most cases, the deposit is due within 24 hours of the offer being accepted. This means that buyers need to have funds readily available to ensure they can meet this deadline, whether it's a competitive market with multiple offers or a private sale.
Why Timing Matters: The deposit acts as an immediate show of good faith to the seller. Once your offer is accepted, the clock starts ticking, and a delay could put your deal at risk. Not meeting the deadline can give the seller grounds to cancel the agreement, which could mean losing out on the property entirely, especially in high-demand areas.
Be Prepared: Having your deposit ready isn't just recommended, it's crucial. Make sure your funds are in place to avoid any last-minute issues. Speak to your financial institution ahead of time, especially if you need a large withdrawal, or to move money around from other accounts or investments as it is not uncommon for banks to require several days for high-value transactions.
Deposit Payment Method
In Ontario, acceptable methods for paying a real estate deposit typically include bank drafts, certified cheques, and electronic fund transfers (EFTs), as these forms of payment are verified by financial institutions and ensure security for the seller.
Certified Cheque: A personal cheque that the bank certifies, confirming that the funds are available in the buyer's account.
Bank Draft: A more secure option issued directly by the bank, guaranteeing that the funds are available.
Electronic Fund Transfer (EFT): This method involves the direct electronic transfer of funds from one bank account to another. It offers a quick and efficient way to move money.
Buyers should verify the brokerage's policy on deposit payment methods and ensure they have liquid funds available.
Lender Requirements: Be Ready to Show Your Money Trail
Before you make an offer, there's one crucial step many buyers overlook: proving where your deposit and down payment funds come from. In Ontario, mortgage lenders will want to see a 90-day history of the accounts where your deposit and down payment are coming from.
You need a paper trail. Be ready to show full account statements for the last three months. If you've moved money around between accounts, you'll need to show that too.
Cash under the mattress? Lenders don't like large unexplained cash deposits. If you've been saving cash at home, deposit it into your bank at least 90 days before making an offer.
Using a gift? If a family member is helping out, you'll need a signed gift letter stating the funds don't need to be repaid.
Using RRSPs or FHSA? RRSPs withdrawn under the Home Buyers' Plan must have been in your account for 90+ days, and you'll need documentation for the withdrawal.
Consequences of Default
If a buyer defaults on closing, meaning they fail to complete the transaction after the binding agreement has been signed, the consequences can be significant.
Loss of Deposit: In most cases, the seller has the right to keep the real estate deposit if the buyer defaults.
Additional Legal Action: The seller may pursue further damages through the courts to recover any financial losses.
Carrying Costs: A buyer may also be responsible for covering the seller's carrying costs, including mortgage payments, property taxes, and maintenance fees, until the home is resold.
Deposit Refundability
The refundability of a real estate deposit depends on the conditions outlined in the Agreement of Purchase and Sale.
Conditional Offers: If the offer includes a financing condition or home inspection condition, and the buyer fails to meet these conditions, the deposit is typically refundable.
Mutual Release: Both parties must sign a mutual release form to refund the deposit.
Legal Disputes: If there's a dispute over the deposit, the funds will remain in the trust account until a court order is issued.
Handling of Deposits
Once the deposit is paid, it's placed in a trust account maintained by the real estate licensee's brokerage or the seller's lawyer. Ontario enforces strict regulations to ensure transparency and protection for both parties.
Trust Account: Deposits are typically held in the statutory Real Estate Trust Account of the seller's brokerage. The funds remain there until the deal closes.
Deposit Insurance: Deposits held in the brokerage's trust account are insured under the RECO Deposit Insurance Program, covering up to $200,000 per claim. This insurance protects against fraud, insolvency, or misappropriation of funds.
Late Deposit and Financing Issues
Timing is everything in real estate transactions. If the buyer fails to deliver the deposit within the agreed timeframe (usually 24 hours after offer acceptance), the seller may consider this a breach of agreement and could cancel the contract of purchase and sale, potentially accepting a backup offer.
Buyers should ensure they have the necessary liquid funds and secure financing commitments to meet deposit deadlines and avoid complications.
Real Estate Deposit Cheat Sheet
Here's a quick-reference guide for real estate deposit essentials in Ontario:
Typical Deposit Amount: 5-10% of the purchase price; varies based on market conditions.
Deposit Payment Methods: Certified cheque, bank draft, EFT (wire transfer).
Deposit Timing: Usually due within 24 hours of offer acceptance.
Deposit Held By: Brokerage's trust account.
Refundability Conditions: Conditional offers, mutual release, court order for disputes.
Consequences of Default: Loss of deposit, potential legal action, and additional damages.
Insurance Protection: RECO Deposit Insurance covers up to $200,000 per claim.
Real Estate Deposit Advice
Here are some tips for buyers to manage their real estate deposits effectively:
Cash-on-Hand: Ensure you have liquid funds to cover the deposit amount, as sellers typically expect a quick turnaround once the offer is accepted.
Bidding War Strategies: A larger deposit can make your offer stand out in a multiple-offer scenario, showing the seller that you are serious and committed.
First-Time Buyers: Don't hesitate to seek independent legal advice and ask questions to understand your deposit obligations fully.
Experienced Investors: Seasoned buyers often adjust their deposit strategy to stand out in competitive markets, using a higher deposit as leverage.
Alternative Arrangements: If special deposit arrangements are needed, make sure they're clearly outlined in the Agreement of Purchase and Sale.
Case Study: What the iPro Realty Closure Revealed About Trust Accounts and Deposit Risks
When a real estate brokerage like iPro Realty Ltd. collapses and $8 million in client deposits go missing, it's not just a headline, it's a wake-up call for buyers, sellers, and agents alike.
What Is a Real Estate Trust Account?
A trust account is a special, regulated account where brokerages hold client funds from the time an offer is accepted until closing. These funds are not to be touched for operational expenses. But if a brokerage becomes insolvent or violates trust account rules, your deposit could be at risk.
Who Actually Holds Your Deposit?
It's not your agent. It's not the seller. Unless otherwise stated, your deposit goes into the listing brokerage's trust account. If that brokerage mismanages funds or closes its doors, your money may be part of a shortfall.
How Deposit Shortfalls Happen
Let's say you're buying a $1 million home and putting down a $50,000 deposit (5%). The listing brokerage receives the deposit. On closing day, your lender sends the balance of funds to the seller's lawyer. The deposit is used to pay agent commissions. Any remaining funds go to the seller.
If the deposit disappears before closing, agents might not get paid, and the seller may not receive the full proceeds of the sale.
Why This Matters
As of iPro's closure on August 19, 2025, over 500 pending transactions may have been affected. While RECO provides deposit insurance of up to $200,000 per claim, there's a $4 million cap per event. With $8 million missing, payouts will likely be pro-rated, potentially cutting compensation by 50% or more.
Final Thoughts: Real Estate Deposits in Ontario
In Ontario's competitive real estate market, understanding deposits is crucial for protecting both buyers and sellers. Real estate deposits signal commitment, provide security, and play a vital role in the transaction process. By staying informed, being financially prepared, and working with a skilled real estate agent, you can ensure a smooth deposit process and safeguard your investment.
If you're looking to buy or sell in the GTA, reach out to SirLuckHomes Real Estate Brokerage for expert guidance through every step of your real estate transaction.
