By: Loans Canada
Condos are typically a more affordable housing option for most Canadians looking to enter the real estate market, with some consumerseven havingenough cash in their reserves to cover the entire cost rather than getting a mortgage. At the onset, paying in cash in full sounds like a good idea, since there are no mortgage payments to have to worry about and tens of thousands of dollars in interest to be paid.
Buyers who are able to complete a purchase transaction without requiring a condition in their offer for financing have a leg up on the competition, too. Sellers will likely look more favourably on buyers who don’t need financing, which can expedite the real estate transaction. This is especially attractive in a bidding war situation where “clean” offers are usually preferred by sellers.
But is paying for a condo in an all-cash transaction really a good idea?
When is it a Good Idea to Pay Cash for a Condo?
Obviously, you’ll need to have enough cash in your accounts to be able to completely cover the cost of a condo in an all-cash transaction. But even if you do, you’ll still want to make sure you have money left over for other expenses. You don’t want to completely deplete your savings in an effort to avoid applying for a mortgage.
Not only that, but all that extra money that you may have will be tied up in one big asset as opposed to being available for other investments. If you are thinking of paying for a condo in cash, make sure you’ve got plenty left over for other expenses and investments.
Let’s weigh the pros and cons of buying a home in cash before you decide which route to take.
Benefits of Paying Cash for a Condo
No need to get approved for a mortgage
These days, getting approved for a mortgage can be difficult, especially for those who do not have the best credit rating or are already carrying a significant amount of debt. Lenders typically want to see credit scores of at least 650 and debt-to-income ratios under 43% before they approve mortgage applications. And with the stress test that borrowers must go through these days, getting approved for a mortgage can certainly be a challenge.
But if you have the cash needed to pay for a condo, then there’s no need to worry about your qualifications for a mortgage. There’s no hassle involved in going through the application process and concerns as you wait and see what the lender decides to do. Instead, that entire step can be avoided.
Own your home outright
While your name might be in the title of the property, with a mortgage, you don’t actually own the place outright. Instead, the lender owns a certain amount of the property, depending on how much equity you have in the home. But if you pay for the condo in cash, you are the sole owner of the property. This can be a liberating feeling to know that you don’t owe anyone anything for your home. Not only that, but there’s no chance of you potentially losing your home to the lender in case you ever default on your mortgage.
No mortgage payments to make
The idea of not having any mortgage payments to make every month is a very attractive option. You will not be leveraged, so you won’t have to make any payments to a lender for your home.
Be a more competitive buyer
In markets where there’s a lot of competition among buyers, it’s important for buyers to make themselves stand out to sellers. And one way to do that is by keeping your offer as clean as possible, which means limiting the number of conditions. There are plenty of conditions that can be inserted into an offer, but one that makes sellers particularly nervous is the financing condition.
Buyers can make a great offer, but there’s always the chance that they will not be able to secure financing to go through with the transaction. If you eliminate that condition and are able to take possession of the condo without having to go through the mortgage approval process, sellers may look more favourably on you as opposed to others vying for the same property.
Real estate has long been a sound way to build wealth over time. But investing in a property that will increase in value without having to pay any interest for a mortgage can help you save much more.
Drawbacks of Paying Cash for a Condo
Tying up your money in one investment
While you might be building more value in an asset by paying cash for a condo, you’re also tying up all your available capital into one asset. This is perhaps the biggest drawback of paying all-cash for your next home. You won’t have any opportunity to diversify your investments if everything is dumped into one thing.
If all of your cash is tied up in one investment, there will be little leftoverfor anything else. And if you ever need to tap into the equity in the condo, you’ll have to go through a lot of red tape to either take out a mortgage to free up some of that cash or sell the property, both of which are not options that will allow you to liquidate quickly if necessary.
No tax deductions
Homeowners in Canada can deduct some of the interest portion of their mortgage if they operate a business out of their home. But there’s nothing to deduct if you don’t have a mortgage or any interest to pay on it.
Costs of Buying a Condo with Cash Vs Using a Mortgage
When you buy a home, there are closing costs that need to be paid. Whether you buy a home with cash or take out a mortgage for it, you’ll need to cover certain closing costs when a real estate transaction closes. These can include:
- Property taxes
- Appraisal fees
- Real estate agent commissions
- Land transfer taxes
- Home inspection fees
- Title insurance
- Lawyer fees
- Prepaid utilities
Generally speaking, you can expect to pay anywhere between 2% to 5% in closing costs when you buy a condo in Canada, regardless of whether or not you pay in cash.
There are certainly some advantages to buying a condo in cash; namely, not having a mortgage to pay. But there are also some drawbacks that need to be considered as well. Weigh the pros and cons carefully before you decide which route to take.