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When purchasing a home in Canada you have many options – you can save as much as you choose and select the down payment you wish to make above the required minimum. You can pay cash, get a mortgage or opt for a happy medium between the two. Regardless of how you choose to pay for your home purchase, we’ve highlighted some of the pros for both options as well as addressed frequently asked questions to help simplify your decision.
Key Takeaways
- Being mortgage free isn’t always your best option – especially if you’re carrying other debt with a higher interest rate
- Having a mortgage enables you to access home equity more easily
- The number one benefit of paying for your home in cash is that you won’t be required to pay interest on an outstanding loan
Are you a first-time buyer?
Cash vs mortgage: choosing your payment
Many people dream of being mortgage free the moment they buy a home. And while this is a terrific goal to reach, it may not always be your best option to pay off your mortgage – especially when carrying other debt, since mortgage debt is considered good debt as your home value is typically appreciating and other debt often comes with a higher interest rate.
Important: The minimum down payment is 5% of the purchase price for a home valued at $500,000 or less and 10% for the portion of the purchase price above $500,000. If you put at least 20% down, you aren’t required to pay mortgage default insurance
Benefits of cash
The number one benefit of paying for your home in cash is that you won’t be required to pay interest on an outstanding loan. And, when it comes time to sell, there’s no mortgage balance to pay out.
Benefits of getting a mortgage
The main advantage for getting a mortgage is that mortgage interest rates are among the lowest out of all other forms of debt. That’s because a mortgage is considered secured debt – since you have collateral in the form of the property you own – versus unsecured debt for such things as credit cards and car loans.
Because mortgage debt is levied at a much lower interest rate, many homeowners take advantage of their home equity to make major purchases – such as completing home renovations, buying a second property, purchasing a car or sending their kids to school. See: Debt Consolidation in Canada | Using Home Equity to Save Interest
Tip: If you want to be able access some of your home equity for other purchases and costs, it makes sense to have a mortgage so you can get a home equity line of credit or refinance as needed
Cash vs mortgage: which is better?
The choice is a personal one and a lot of factors come into play as outlined above. The biggest consideration is whether it makes sense to owe nothing on your home but carry higher interest debt on other loans when it could save you more in the long run to have a mortgage.
It often makes more sense, however, to make as large of a down payment as possible to find a good balance between paying cash and holding a mortgage on your home. If you can put down at least 20%, you’ll save a significant amount of money by not having to pay for mortgage default insurance, which is required for all mortgages with a loan to value greater than 80%. See: Mortgage Default Insurance Calculator
Frequently Asked Questions
Can I buy a home in Canada with cash?
Yes. You can certainly purchase a property with cash. But that doesn’t mean it’s the best decision, especially if you plan to carry debt outside of your mortgage at a higher interest rate.
Can you be foreclosed on without a mortgage?
Yes. If you don’t make the required payments regularly and on time, your mortgage can go into foreclosure.
Is it easier to buy a home with cash or a mortgage?
Both options have their pros and cons. This depends on your unique situation and whether you plan to carry debt outside of your mortgage at a higher interest rate. It’s always best to discuss your options with a nesto advisor.
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When it comes to mortgages and real estate financing, I've got a solid foundation of knowledge. Let's dive into the concepts mentioned in the article "Buying a House in Canada with Cash vs Getting a Mortgage."
Down Payment and Minimum Requirements: In Canada, the minimum down payment for a home is 5% of the purchase price for a property valued at $500,000 or less, and it rises to 10% for the portion of the purchase price above $500,000. Additionally, putting down at least 20% eliminates the need for mortgage default insurance.
Cash Purchase Benefits: Paying for a home in cash eliminates the need to pay interest on an outstanding loan. When selling the property, there's no mortgage balance to settle, giving a clear financial advantage.
Mortgage Advantages: Mortgages offer lower interest rates compared to other forms of debt like credit cards or car loans due to the secured nature of the debt, with the property acting as collateral. This low-interest debt allows homeowners to leverage their home equity for various purposes such as renovations, buying additional properties, funding major purchases, or even education expenses.
Cash vs. Mortgage Considerations: The decision between cash and mortgage payments depends on individual circ*mstances. While being mortgage-free might seem appealing, it might not be the optimal choice if it means carrying higher interest debt elsewhere. Striking a balance by making a substantial down payment, ideally 20% or more to avoid mortgage default insurance, could be financially beneficial.
Frequently Asked Questions:
- Buying with Cash: Purchasing a property with cash is possible but might not always be the best decision, especially if there's other higher-interest debt planned.
- Foreclosure without Mortgage: Yes, foreclosure can happen even without a mortgage if regular payments aren't made.
- Easier Purchase: The ease of purchasing with cash or a mortgage varies based on individual situations and plans regarding other debt. It's advisable to discuss options with a financial advisor or mortgage expert.
These concepts underscore the complexities involved in deciding between cash purchases and mortgages in the Canadian real estate market. Making an informed decision involves assessing personal financial goals, current debts, and long-term benefits, which often warrants professional advice.
