There is some misunderstanding in the real estate world about the role of deposits. A deposit is a crucial part of the Agreement of Purchase and Sale (APS for short). Buyers provide a deposit to show they are serious buyers, and it gives sellers security in the transaction. However, some buyers and agents think an accepted offer without a deposit is null and void.

In Ontario, the APS is signed under seal. That means it is a legally binding document once it’s signed, not once the deposit is received. Simply put: if you don’t bring the deposit, the Sellers can sue you for breach of contract… not bringing the cheque doesn’t cancel anything, and it’s always the wrong move, whether the deal is conditional or firm.

The Short Version

• The average deposit is around 5% of the purchase price.
• The deposit is due the next business day after acceptance of the offer, unless otherwise specified in the APS.
• Deposits should be kept in the listing brokerage’s trust account, or the buyer’s or seller’s lawyer’s trust account — never the agent’s or seller’s personal account.
• Keep your deposit funds in an easily accessible account at a major Canadian bank, not with an online bank.
• Deposits are usually returned if you back out of a conditional sale, provided you do so within the conditions outlined in the APS.
• Not bringing your deposit cheque does not cancel the deal, it’s a breach of contract, not an escape hatch, whether the deal is conditional or firm.
• Your deposit funds are credited towards your down payment on the closing date.

 

When Is the Deposit Due When Buying a House?

A strong deposit is an essential part of a successful offer. While most buyers offer around 5% of the purchase price, the deposit can be much more or less.

In heated markets, where there are 10–20 other bidders, serious bidders will offer more than 5%. Very serious bidders might even include the deposit cheque with the offer. This cheque stays with the buyer’s agent and is returned if the Sellers accept another offer instead.

In balanced market conditions, buyers usually provide the deposit the day after offer acceptance. The APS has a standard clause outlining that deposits are due within 24 hours’ notice, but in real-life practice, homes are sometimes sold after banking hours, in which case the deposit is due the next day during normal banking hours.

For real estate deposits, only a bank draft, certified cheque, wire transfer, or direct deposit is acceptable. Cash and personal cheques are usually unacceptable.

Once you’re ready to purchase a home, preparation is key. The first step is to move your deposit money to one of the major Canadian banks. Online banks often promise “next-day” bank draft delivery, but in our extensive experience, the draft never arrives on time. Don’t risk your purchase by relying on a courier, move your deposit money to a brick-and-mortar bank and keep it in a chequing account.

Where Do Real Estate Deposits Go?

Where a deposit is held is up to negotiation between the buyer and seller. In most transactions, the deposit is held in the selling brokerage’s real estate trust account; an account which, by law, is only used for keeping deposits safe. In some circumstances, the deposit is kept in a lawyer’s trust account instead, which happens with preconstruction, off-market, for-sale-by-owner, and sometimes commercial deals.

One benefit of working with a registered real estate agent is that all agents are legally required to carry consumer deposit insurance, covering theft, fraud, insolvency, or misappropriation of funds. There’s no deductible to make a claim, and coverage is up to $200,000 per claim and $4 million total for a single event. There are limits to this insurance, though, visit the Real Estate Council of Ontario for full details.

Most real estate trust accounts bear interest, which means if you have a significant deposit sitting in trust for many months, you could earn a return on it. The information for the trust account is usually found in Schedule B of the agreement of purchase and sale.

What Happens to the Deposit Money on Closing Day?

Your deposit is held in trust and credited to the purchase price. In Ontario, a 5% deposit is common, and that amount is credited towards your total down payment.

For instance, if you buy a $1,000,000 home, the expected deposit is $50,000, credited towards your down payment. If you plan to put down 20%, you owe a further $150,000 on closing day, plus closing fees, of course! You can read more about closing fees here.

What Happens to the Deposit Money When You Back Out During the Conditional Period?

It depends on the clauses used. The most common clauses in Ontario real estate stipulate that the deposit is returned to the buyer if they back out on one of their conditions, as long as the buyer was acting in good faith.

Some buyers use conditions that include an irrevocable deposit, meaning they can back out during the conditional period, but forfeit their deposit if they do. This isn’t common, but it’s a useful negotiating tool, if you’re 99.99% certain you can get financing, an irrevocable deposit condition is almost as good as a firm offer in the seller’s eyes, while still giving you the chance to confirm financing before fully committing.

Regardless of the condition and terms used, the seller always has to agree to release the deposit back, both parties need to act in good faith during the conditional period. We mention “good faith” often, because if a seller can prove you didn’t act in good faith to complete your conditions, your deposit could be at risk. A good example: purchasing a home, then buying a second home during your 5-business-day condition period, and then trying to use your home inspection clause to back out of the first deal. If the seller hears about the second purchase, they may refuse to release your funds, and while you might still be entitled to a return, you’d likely need a lawyer to retrieve them.

It’s also worth being clear on what backing out actually means here: not bringing the deposit cheque at all isn’t a legitimate way to exercise a condition. A conditional sale can only be cancelled if a real condition genuinely isn’t met, unsatisfactory financing, or a home inspector finding a defect.

What Happens to Your Deposit If You Back Out of a Firm Real Estate Deal?

If the offer is firm, ie. all conditions have been removed, the deposit money, and potentially much more, is in jeopardy. Backing out of a deal at this point is considered a breach of contract. This is something you want to avoid if at all possible: it likely means losing the deposit, and in some cases, being sued for additional damages well beyond it.

Here’s how the math actually works. Say a buyer agrees to purchase a home for $1,000,000 in a firm deal, and then tries to walk away. If the seller has to remarket the home and can only sell it for $950,000, the original buyer can be sued for that $50,000 shortfall, plus the seller’s carrying costs (mortgage interest, property tax, utilities) and legal fees for the time the home sat back on the market. If the seller manages to resell for $1,000,000 or more, they haven’t suffered a financial loss, so there’s nothing to sue for, but the seller may still try to keep the buyer’s deposits.

This isn’t hypothetical, and it’s important to understand that a buyer’s exposure isn’t capped at their deposit amount. In a well-known 2017 case out of British Columbia, a buyer walked away from a firm deal; the seller’s home ultimately resold for $350,000 less five months later, and the court ordered the buyer to pay that full $350,000 shortfall, plus roughly $10,000 in carrying costs. The seller can absolutely come after a buyer for more than just the deposit cheque amount.

When a buyer breaches a firm contract, nothing happens with the deposit money until both parties agree on the next step. The brokerage or lawyer holding the deposit cannot release the funds until both parties agree, or until one party obtains a court order. If both sides agree to release the funds to the seller, a mutual release is signed. A mutual release ends the contract entirely, it releases every party from the agreement and any legal liability tied to it, and it will outline exactly how the deposit is handled. In most cases, the seller keeps the whole deposit; occasionally, sellers will pursue further damages beyond it, as in the example above. Once a mutual release is signed, the contract is dead, the buyer is free of all further obligations, and the seller gives up their right to pursue anything further.

Sometimes, there’s genuinely nothing anyone could have done. We sold a home four years ago where the deposit never arrived, not because the buyer backed out, but because FINTRAC had frozen the funds on suspicion of money laundering. Even if our clients had already seen the deposit sitting in our brokerage’s trust account, a federal agency stepping in to seize it would have overridden all of that. We couldn’t pursue damages because the buyer had disappeared and the money itself had been confiscated as part of the investigation. It’s a good reminder that a good realtor can protect your interests through almost anything, but not every outcome is something anyone could have prevented.

In Summary

• Deposits are usually around 5% of the purchase price, though specialty properties sometimes demand a larger deposit.
• Deposits are due the next day after offer acceptance, unless otherwise negotiated with the seller.
• Deposits should be kept in a separate trust account, never the seller’s, agent’s, or lawyer’s personal account.
• Not bringing your deposit cheque doesn’t cancel a deal, conditional or firm — it’s a breach of contract, and your liability can extend well beyond the deposit amount itself.
•  Deposits are credited towards your down payment on closing.
• For more real estate advice, Contact Us!