Which Is Better: Buying With Cash or Mortgage In Real Estate?
February 1, 2022 | Posted by: Ronice Harrison
Not every homebuyer is lucky enough to have the coveted choice between buying with cash or taking out a mortgage. The majority of people looking to buy a new home will simply go with the option of mortgage financing.
That's because having hundreds of thousands of dollars readily available is just out of the question for most buyers.
In fact, a recent survey by Zillow showed that only 23% of their users buy their homes with cash. And to be honest, we’re surprised the number is even that high. Another similar survey showed the figure to be just around 10%.
However, if you are one of the few fortunate 'cash-laden' people, this article is for you!
Read below the advantages of cash-down purchasing vs. getting a mortgage for your home, and figure out your best route!
Advantages of Buying a Home With Cash
Let’s take a look at three clear advantages of buying a home with cash payment.
1) Avoid Borrowing Troubles & Stress
A major advantage of an all-cash deal is that you'll never have to go through the trouble (both financial & non-financial) that comes with borrowing money in Canada.
You know what we’re talking about. Credit checks, mortgage applications, income reports, convincing lenders, monthly premiums, foreclosure fears, the headaches just pile on.
Once you pay for a home in cash, it's yours, and you can live in peace for the rest of your life. But, liberty from mortgage premiums doesn’t mean you're exempt from paying property taxes, maintenance costs, and HOA fees if any.
All the other expenses will stay, but the bulk of your income will be saved from going to the lender every month. Then, you can put the savings (typically 1000s of dollars per month) to a better use.
2) Cash Is More Attractive to Sellers
Buyers with mortgage financing have a thousand tests that they need to pass before they can get a lender's approval. The vetting process is long… and at the end of the day, the buyer can turn out to be no good. And in that case, the seller will be back to square one of the process, losing precious time.
Then another buyer walks in, and the cycle begins again.
In fact, a report from the National Association of Realtors claims that 7% of canceled home sale contracts are because of financing issues.
This is frustrating for sellers, especially those looking to move out urgently.
So, isn't it clear why sellers prefer cash over financing?
Giving a cash offer will always make you more attractive to sellers. This way, you’ll be at the front of the line to get the best deals.
3) Become a Homeowner Fast
As soon as you pay the home price in cash, the deal is done. Congratulations, you just became a property owner, wasn’t that easy?
Speed is probably the best part of cash buying.
With cash, you don't have to wait until retirement (and probably after that) to own a house. As you pay cash in full, you become the homeowner there and then.
Benefits of Using Mortgage Financing
Now, on the flip side, just because you can buy in cash doesn’t mean you should. Let's walk through the benefits of mortgage financing below so you can see the other side.
1) Invest Elsewhere for a Better Return
The mortgage vs. cash tradeoff is often settled by calculating opportunity costs.
When you pay in cash, you essentially lock in your money that could've been used in other (maybe more profitable!) assets like bonds, stocks, or other real estate deals.
So, that's your opportunity lost.
Getting a mortgage is particularly best if the interest rate is lower than the average rate of return.
Because, for instance, you could earn 8 - 12% in interest from stocks and bonds (the average yearly stock market return), while paying just a 3% interest rate on your mortgage.
Or alternatively, you could invest 20% of the home value into 5 investment properties that bring you $200 of cash flow each month (even after the mortgage), instead of investing it all into one property paying just $500.
In both these cases, you can see how the mortgage is an obvious choice if you want to make the biggest return on your money!
If you buy your home with all-cash, you compromise your liquidity. So when a great investment opportunity comes your way, you can do nothing but let it pass. You could become liquid again by refinancing your home - but that's just another type of mortgage. So why not go with it first?
2) Get Tax Breaks on Interest
Unlike the US, the interest on a mortgage for a principal private residence in Canada is not tax-deductible.
However, if the property you are buying is an investment (that generates income), then your mortgage is eligible for a tax break!
So, those looking to decrease their tax liability from investments can consider the mortgage as their solution.
Alternatively, you can also buy your private residence in cash, and then refinance it to take out a mortgage. As you use that money to invest, the mortgage also becomes tax deductive, no matter what investments you make with it!
Learn more about this mortgage tax strategy in this great Investopedia article.
3) Mortgage Loans Are Among the Cheapest
Believe it or not, a mortgage is one of the cheapest forms of debt in Canada.
With as little as 5% down, you could assume homeownership and pay fixed or moving rates of as little as 1.45%!
So, opting for this cheap financing option could be a better route than tying up all your cash in the home.
The truth is that most homebuyers will have to go with the mortgage financing option due to cash restraints. Canadian home prices just don’t allow for many cash purchases right now…
But those who have the choice should work diligently to figure out what's best. Because, sometimes, interest rates may take a dive, and a mortgage would seem more suitable.
At other times, cash could seem like the right option to scoop a deal up quickly. Remember, it's not about your personal likes and dislikes.
To get the most out of your investment, be 'rational', run the numbers, and trust the numbers - not your emotions.
Because only with the right mind will you be able to make the right decision!
And if you need any mortgage advice, contact the expert team at AQRE Lending for their insight into your unique situation.
Whether you have good credit or bad, a full cash offer or just a 5% down payment, they can help find a tailored mortgage solution to your situation.