Buying a home is one of the largest purchases most Canadians will make, and how you choose to finance it can significantly affect your financial future. Should you buy a house outright with cash or take out a mortgage to spread the cost over time? Both options have their advantages, depending on your lifestyle, liquidity, purpose for the subject property and long-term goals.

Some who have the funds available may prefer the security of owning a home outright rather than paying a monthly mortgage payment or interest to carry a mortgage. Some may not have the means to pay the entire amount in cash, so a mortgage is often the only option. Others prefer to hold onto their cash and keep it elsewhere while slowly paying off their home over time. 

Let’s examine the pros and cons of both approaches, including their impact on affordability, investment strategy, and peace of mind.

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Key Takeaways

• Paying cash avoids interest and debt but limits liquidity and financial flexibility.
• Mortgages preserve capital and offer leverage but involve interest and approval hurdles.
• The best choice depends on your financial health, market outlook, and personal goals.

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What It Means to Buy With Cash

Buying a home with cash means paying the full purchase price and closing costs upfront without relying on financing. The simplicity of a cash deal can be especially appealing, particularly in hot markets where a quick close is essential to give you an edge and beat out competing offers.

Cash buyers avoid several steps required when financing through a lender, including stress test qualifications, appraisals, and loan approvals. This leads to a more straightforward transaction and can give you an edge over buyers who need to have a condition of financing attached to their offer. 

What It Means to Get a Mortgage

Taking out a mortgage means borrowing funds from a lender to pay for your home, which you then repay over time. Most Canadian mortgages have a 25 or 30-year amortization period and require you to qualify based on your income, credit score, debts, and the results of the federally mandated stress test.

Although more complex, mortgages can be a more affordable way to homeownership, as you only need to provide a down payment to purchase, with the mortgage covering the rest of the purchase price. Additionally, having a mortgage gives you the flexibility to keep some of your savings intact, which could be used for renovations, investments, or building an emergency fund.

Pros and Cons of Buying With Cash

Buying with cash can offer peace of mind, especially for those who prefer to avoid monthly payments or the uncertainties of interest rate cycles and the total cost of borrowing (COB). But like any financial decision, it comes with trade-offs. 

The absence of a mortgage payment means reduced financial stress and full homeownership from the very beginning. It also removes the risk of foreclosure and makes you a more attractive buyer in competitive housing markets. 

Despite the simplicity and overall interest cost savings, using cash can limit your overall financial agility. When you spend a large sum on a home, that money is no longer available for emergencies, investment opportunities, or other major life expenses. 

Advantages of Buying With Cash

• Allows for a faster closing process with fewer conditions.
• There is no need for mortgage default insurance, fees, or lender appraisals.
• Stronger negotiating position when making offers. 
• Full equity ownership from the start. 

Disadvantages of Buying With Cash

• Capital is locked into an illiquid asset and is not as easily accessible.
• Potentially lower returns compared to diversified investments.
• Limited or no tax advantages versus mortgage interest deductions (rental properties only).
• Reduces your ability to manage unexpected expenses without other savings.
• It carries investment risks, as a significant portion of your portfolio is tied to the location and can only be bought and sold in Canadian dollars, as opposed to a diversified portfolio that may hedge against foreign exchange risks.
• Lenders monitor their collateral, ensuring that no one attempts to change the title or incur additional liens without consent when you have a mortgage.

Pros and Cons of Getting a Mortgage

Most Canadians rely on a mortgage to finance their home purchase. Taking on a mortgage provides access to homeownership while keeping capital available for other priorities, such as investments, renovations, or savings. But it also introduces debt and interest-carrying costs. 

A mortgage allows you to retain your cash, which can be crucial for financial flexibility. Many Canadians prefer this approach because it enables them to invest, renovate, or build savings while still entering the housing market. 

Borrowing money to buy a home means taking on debt, and that comes with both financial costs and stress. You’ll need to qualify for the loan, stay on top of payments, and accept that a portion of each payment goes toward interest, not equity. 

Advantages of a Mortgage

• Borrow funds at historically low interest rates, as well as the lowest interest rates available compared to other credit products.
• Preserves liquidity and allows for more diversified financial planning.
• Allows you to continue growing your savings, rather than restarting, over the same period as you pay down your mortgage balance.
• May provide access to tax deductions if the property (or a portion of it) is used for investment purposes.
• Enables buyers to enter the market sooner, even without having saved the entire purchase price.
• Peace of mind, as the lender protects their collateral, ensuring that no third party attempts to alter the registered mortgage charge against your title.

Disadvantages of a Mortgage

• Long-term interest costs and a higher total price paid over time.
• Mandatory mortgage default insurance for down payments under 20%.
• Less negotiating power compared to cash buyers.
• Possible rejection if income, credit score, or debt service ratios don’t meet lender criteria.
• Lack of flexibility if you want to relocate for a new job or family.
• Closing costs for both buying and selling.

Which Option Builds More Wealth Over Time?

This is one of the most debated points for homebuyers, and the answer depends mainly on your financial profile and potential returns from investments. For example, you may be able to build more wealth over time by having a mortgage and investing the rest if you can secure a mortgage at 4% and invest your remaining capital in a diversified portfolio for a return of 6% to 7%.

However, not everyone has the risk tolerance, expertise, or time to manage investments successfully. For many, the guaranteed return of avoiding interest payments and the peace of mind that comes with owning a home outright can often outweigh the potential gains from the stock market. Always compare your expected return on investment (ROI) to your mortgage interest rate and consider your risk tolerance. 

What to Consider Before Choosing to Buy in Cash vs Mortgage

If you have the means to buy in cash and are considering both options, make your decision not only based on the cost of the home itself but also your savings, investment goals, borrowing capacity, and risk tolerance. 

What works for one person might not suit another, so understanding the nuances of your situation is key to choosing the right option. Consider the following as you narrow down which approach is better aligned with your long-term financial health and lifestyle preferences.

Current Interest Rates 

Interest rates can heavily influence the decision to pay in cash. In a historically low-interest rate environment like today’s, borrowing becomes more attractive. When rates are high, paying cash can reduce your overall interest-carrying costs. Understanding how rate changes affect your monthly payment and total borrowing costs can help you determine which option offers the most benefits.

Market Conditions

In a competitive seller’s market, where multiple offers are common, cash buyers may have the edge thanks to faster closings and fewer contingencies. On the other hand, in a slower market with rising inventory and price corrections, securing a mortgage may make more sense, as you’ll have more time to negotiate and place conditions on your offer. Paying attention to local housing trends, seasonal activity, and broader economic indicators, such as employment rates and inflation, can help inform your decision.

Your Cash Flow and Emergency Fund

Liquidity matters; even if you can afford to buy a home with cash, it may not be the wisest move if it leaves you without an emergency fund. Ideally, homeowners should have 3 to 6 months’ worth of expenses set aside, separate from their home equity. Cash buyers must budget for additional costs of homeownership, including property taxes and maintenance, as well as unforeseen events such as job loss or other unexpected expenses.

Investment Opportunities and Risk Tolerance

If you’re comfortable investing and confident you can beat your mortgage rate with long-term returns, a mortgage can help you grow your wealth faster with a more diversified portfolio. On the other hand, if you dislike market volatility, the certainty of owning a home outright and allowing it to appreciate could be worth more than potential investment gains.

Scenarios: When Cash or Mortgage Makes Sense

There is no one-size-fits-all answer when choosing between paying cash and financing your home with a mortgage. The decision often depends on your life stage, financial goals, and risk appetite. 

• Cash may be ideal for retirees downsizing to reduce expenses and avoid debt in retirement.
• Mortgages may be a suitable option for young professionals who want to enter the housing market while building savings and investing for the future.
• Real estate investors often favour mortgages to write off interest expenses and tap into home equity to grow their portfolio.

Frequently Asked Questions (FAQ) on Buying Property with Cash vs a Mortgage

Final Thoughts

Ultimately, there is no universally correct answer as to whether buying in cash or getting a mortgage is the better option. The decision will come down to trade-offs between debt-free ownership and financial flexibility. Consider your liquidity needs, opportunity costs, risk appetite, and long-term homeownership goals when making your decision. 

Contact a nesto mortgage expert who can help you uncover the homeownership strategy that best fits your unique needs and long-term financial goals.

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