Tips on Buying a House with Cash
Learn about the pros and cons of paying for a home with cash.
By Emily Southey | 10 minute read
Buying a house is a major decision that requires buyers to think long and hard about how they plan to fund such a purchase. Generally, there are two options when it comes to paying for a home: paying with cash or paying with a mortgage. Since carrying debt can be stressful, buying a home with cash may seem like the better option ⸺ for those who can afford it. But there are several considerations to make when contemplating how to pay for your future home.
What are cash buyers?
As home prices have risen around the world, paying for a house with cash might seem like a pipe dream. But the reality is that buying a home with cash is still relatively common. Some experts estimate that as many as one-fifth of buyers are cash buyers. While a portion of these cash buyers are likely companies that invest in real estate, such as house flippers, some are homeowners just like yourself. Cash buyers usually have a large amount of cash available, whether they saved up this money through solid investments or recently sold their previous home and are using the money to buy a new one.
If you plan on buying a home with cash in Ontario, you will need to provide proof of your ability to purchase the property with cash. This is usually done through your bank. Since cash deals tend to close quicker than those involving mortgages, cash transactions may be as short as two weeks (compared to the 30 to 45 days that mortgage transactions require).
If the seller agrees to accept the cash offer and the home closes, the homebuyer owns the property. It’s as simple as that. No mortgage payments or financing necessary. However, the buyer will still be responsible for paying additional expenses like property taxes, utilities, home insurance, and more.
Though being a cash buyer might seem appealing for the convenience it offers, it does come with its drawbacks. Below, we outline the key differences between buying a home with cash and buying a home with a mortgage.
Paying cash vs. buying a house through mortgage lenders
Whether you’re buying a home with cash or with a mortgage, the basic outcome is the same in that you will take possession of a property. However, paying with cash means not having to make expensive mortgage payments each month or pay interest on your loan. It also allows you to invest any extra cash you have back in the stock market, which can result in a higher net worth than if you had to devote a portion of that to your mortgage (even if you were able to pay off your mortgage quickly).
On the flip side, buying a home with a mortgage gives the buyer leverage as they won’t have sunk all of their savings into their home purchase. In contrast, cash buyers don’t have as much leverage. If they spend most of their money on the home purchase, they may not have money to pay for other items, such as a new car or renovations. Since the cash buyer’s money is tied up in a single asset, they might need to sell the house to regain some liquidity. And if they are forced to sell their home in a cool market, they may not get the money they paid for it. Ultimately, paying with cash and obtaining a loan through mortgage lenders are the two most common methods buyers use to purchase homes in Canada. The pros and cons of each are detailed next.
“Some experts estimate that as many as one-fifth of buyers are cash buyers. While a portion of these cash buyers are likely companies that invest in real estate, such as house flippers, some are homeowners just like yourself.”
The pros of being a cash buyer
Cash buyers may be more attractive to sellers
If the market is hot and any one house is likely to have multiple bidders, being a cash buyer can be a major advantage. Sellers typically prefer to work with cash buyers over buyers who require financing because they don’t have to worry about a loan falling through at the last minute. Plus, cash home sales tend to be faster, with buyers agreeing to shorter closing dates.
Cash buyers typically benefit from lower closing costs
Closing costs are one of many out-of-pocket expenses that come with purchasing a home. However, these costs are partially dependent on whether you are financing your home or paying with cash. In the former situation, your lender may charge you certain fees that increase your closing costs. These may include application fees, loan origination fees (finder’s fee), or lender fees. But when you pay with cash, you won’t have to pay any lender-related closing costs, which usually makes it less expensive to close on your home.
Buying a house with cash means no mortgage payments or interest
Another benefit of paying for a house with cash is that you won’t be responsible for monthly mortgage payments. Not to mention all the fees that come with mortgage payments, like interest rates or mortgage loan insurance.
Cash buyers benefit from a simpler closing process
Paying with cash means no complicated paperwork from your mortgage lender. This usually translates to a simpler closing process.
Cash buyers may have faster closings
Paying for a home with a mortgage almost always takes longer than paying for a home with cash. This is because you have to wait for the mortgage lender to approve and process your loan. Therefore, from the moment you submit your offer to the moment you take possession can last a month or more when you pay with a mortgage. This timeframe is shortened to roughly two weeks when you pay with cash.
The cons of being a cash buyer
Your money is tied up in your new home
The main disadvantage of buying a property with cash in Ontario is that your money is tied up in one asset: your new home. Most people who pay with cash end up allocating a large portion of their money to this one purchase. Since real estate purchases are fairly illiquid, you won’t be able to easily access this money unless the home is sold. For example, if an emergency arises and you need money fast, you may not have enough funds in your savings account. Your only option might be to sell your home, which would likely give you the cash you need but it would take some time to acquire.
Therefore, while owning your home outright offers peace of mind to buyers, it could jeopardize your financial security. If you have to use all your savings to buy a home with cash, it might be worth thinking twice about the decision. You should always aim to have enough money in your savings account for emergencies or unexpected costs like home repairs.
You will miss out on mortgage tax deductions
When paying for a home with a mortgage, you may be eligible for tax incentives or assistance programs offered by provincial and federal governments. Unfortunately, these incentives are only available for those who finance their home, not cash buyers.
A less thorough inspection
Another con of buying a home with cash is that the buyer may not inspect the property as thoroughly as they should. When you buy a home with a mortgage, your lender is effectively investing in your property. Therefore, they require extensive checks, ranging from home inspections to appraisals. Since cash buyers are not required to do this, their research may not be as thorough. This could cause them to overpay for the property or inherit a property in need of major repairs that were overlooked during the buying process. For example, if cash buyers don’t hire an inspector to carry out a home inspection, they may only find out about less visible problems, such as structural issues, after the deal is done. Surprises like this may not only cost you more money but can also complicate the future sale of the house.
You still have to pay additional expenses
Cash buyers aren’t exempt from paying additional housing expenses. Even though they won’t be making mortgage payments or paying for mortgage loan insurance, they are still required to pay for other housing-related expenses. These may include property taxes, homeowners insurance, utility bills, and regular property repairs or maintenance.
Tips for buying a house with cash in Ontario
If buying a house with cash is right for you, consider the tips below.
- Don’t rush the homebuying process: When buying a home with cash, you might be tempted to get the homebuying process over with as quickly as possible (after all, it can be stressful!). But rushing the process could lead to problems down the line. For this reason, cash buyers should use the same amount of discretion that a mortgage lender would use during the approval process. This might mean scheduling a home inspection, hiring an appraiser, conducting title research, and purchasing homeowners insurance. Once the transaction is done, the cash buyer owns the home outright. This is exciting but also comes with risk, which is why cash buyers should approach the homebuying process as meticulously as a lender would.
- Hire a realtor and a real estate lawyer: Hiring a realtor is not mandatory in Canada, and cash buyers may be especially tempted not to pay for one. But the expertise and resources realtors have make them a valuable asset. Find a realtor that specializes in cash purchases, as well as a real estate lawyer who can help you transfer the property title.
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Frequently Asked Questions
Is it easier to buy a house with cash?
Buying a home with cash is usually less complicated than buying a home with a mortgage, namely because you don’t have to wait for a lender to approve, underwrite, and process your loan. You also won’t have to pay for certain expenses that those who finance their home must pay for, such as mortgage payments, interest, and mortgage loan insurance. That said, buying a home with cash is a process that should never be rushed. Even though you won’t have to wait for approval from a mortgage lender, you should still do your due diligence. This means booking a home inspection, hiring an appraiser, and buying a homeowners insurance policy.
If I have a low credit score, do I have to buy a house with cash?
No, you have a few options when buying a home with bad credit. While paying with cash is one option, another option is to apply for a mortgage through a private or subprime lender. These lenders specialize in mortgages for buyers with low credit scores. Bad credit mortgages tend to be shorter in length (between 6 months and 3 years), but they also come with higher interest rates. If you aren’t sure whether you qualify for a mortgage through a traditional lender, check your credit score and reach out to financial institutions near you to ask about how they categorize bad credit. Generally speaking, most traditional mortgage lenders will not approve a loan for a buyer with a credit score below 600. If your credit score is under 600, your only options may be buying a home with cash or getting a mortgage from a B lender.
What are the benefits of buying a home with cash?
Cash buyers may derive several benefits from purchasing a home with their own money. For example, paying cash for a home means no mortgage payments, interest, or mortgage loan insurance payments. It also translates to lower closing costs since there will be no lender-related fees, like appraisal fees or loan origination fees.
Further, cash buyers tend to be more attractive to sellers. Therefore, paying with cash might increase your odds of getting a home, which can be vital in a hot market where homes have multiple bidders. Sellers tend to favour cash buyers because the odds of the deal falling through are lower without a mortgage lender involved. Plus, since the seller doesn’t have to wait for the mortgage lender to approve the buyer’s loan, the process also tends to be quicker and simpler.
Sometimes, cash buyers also benefit from a lower selling price. Since paying with cash simplifies the homebuying process, a seller might be willing to agree to a lower price in exchange for the convenience of a cash offer.
Can I buy a house with cash?
Yes, you can buy a house with cash in Canada. There are no restrictions on paying for real estate purchases with cash. Keep in mind that buying a home with cash does not literally mean forking over hundreds of thousands (if not millions) of dollars in cash bills. Rather, it means that a buyer is using their own money to cover the full purchase price of the home and does not require the assistance of a mortgage loan.