Home Ownership: Zero Mortgage or Mortgage

By Corey Sherwood

The home buying process is one of the most exciting times in your life, but it can also be one of the most stressful. There are a lot of big decisions to be made between searching for a place and closing on one, including comparing all your mortgage options.

The size of the mortgage you can afford depends on the type of loan you apply for and the size of your down payment. With a larger down payment, you can generally qualify for a lower interest rate, which results in lower monthly payments and allows you to borrow more. But for those who have enough to purchase a home outright, is it better to do so or take a mortgage? The honest answer depends on your financial status and current homeownership options.

For older individuals, the concept of living mortgage-free is appealing. Many people sell their home and downsize to a property that’s easier to maintain. Homeowners who have little or no mortgage left on their property might consider whether they want to purchase another property with the sale proceeds rather than getting a mortgage.

Leverage

Leverage is a pretty simple concept, but you might not completely understand its value until you start to build a business. In the investment world, leverage has been used to multiply your money — as in, use borrowed funds to make more money — which is a lot like what you're doing with your finances. 

In a real estate context, leverage refers to using debt (a mortgage) to multiply the potential return on your real estate investment. For example, a 20% down payment and good credit history might get you the property you want. In this case, you would be using 80% leverage.

It makes sense to consider a loan if you can earn more by investing the funds instead. Leverage is less appealing to overly conservative investors. It might also be an undesirable option if mortgage interest rates are high.

Benefits of paying with cash

The main benefit of paying with cash is that it eliminates the need to have to pay interest on a loan. For sellers, this might be a more attractive option since they won’t have to worry about the deal falling through if the buyer is not accepted for financing. Further, a cash purchase usually means the deal can be closed faster. 

4 alternatives to a traditional mortgage

If you’re looking to buy a house and don’t have the cash to purchase a home outright, a mortgage is an essential part of the process. But if you're itching for a change from the traditional way of doing things, there are alternatives to a mortgage that may be worth considering. These alternatives to mortgages will save you lots of money in interest payments when buying a house, as well as give you more control over your finances and reduce your monthly payment obligations.

1. Borrow from a retirement account

One of the alternatives to a mortgage is borrowing from an RRSP or other retirement account. The Home Buyer’s Plan in Canada allows you to withdraw up to $35,000 a year to put towards purchasing or building a home. 

2. Borrow from your parents

The so-called "Bank of Mom and Dad" is another alternative to a mortgage. If your parents are willing to lend you money, this can be one option for getting the funds necessary to buy a home. The interest rate and repayment terms will be up to them, so ask what they're offering before borrowing the money. Be careful going this route as it might completely change your family dynamic, and maybe for the worse. 

3. Rent-to-own

Rent-to-Own (RTO) refers to the practice of renting a home for a period of time, then purchasing it at a reduced price. RTO is a financing option offered by many landlords to help buyers get into homes. There are a lot of benefits to this scheme, and some of the top reasons why Canadians are interested in RTO are that it involves a smaller down payment.

4. Vendor financing

Vendor financing is a type of non-traditional home financing in which the seller acts as an intermediary, lending money to the buyer. The property is then financed by the seller of the property and the buyer acts as an "underwriter" for the seller. The buyer then takes responsibility for payment of the debt incurred by the transaction. The advantage of seller financing is that normally there are no fees or intermediaries.

Save more for a down payment

When you're looking for a house, you'll probably find that a mortgage is the only way to get the home you want. But that doesn't mean you have to take on a huge debt to get the place of your dreams. Instead, you can save up money for an average down payment on a house. 

There are so many people who struggle to put away the extra money that they need to purchase their first home, so it’s wise to start saving as early as possible for your down payment. It will lower your monthly costs and make you a more competitive buyer.

The bottom line

The best option when considering cash, a traditional mortgage route, or a non-traditional route is to determine which is the most feasible for your financial situation. 

If your down payment is large enough to qualify for a traditional mortgage and you have the cash on hand to make the upfront payments, then purchasing with a mortgage may be best. Alternatively, if you’re cashing out on a sale and looking to downsize, purchasing a less expensive property outright might be more appealing than signing for another mortgage.

In some cases where a buyer has no money at all or is unable to get financing through traditional channels, it could be worth looking into one of these alternative mortgage options. The best way to determine which route is right for you is to speak with a financial advisor.