Paying for your house in cash: A good strategy?

04 November 2018 by National Bank

Do you ever dream of what your budget would look like without monthly mortgage payments? It goes without saying that paying for a house in cash is not something that everyone can afford. But certain life events can make this possible – a major inheritance, returns on profitable investments, or a lifetime of savings that you can use to buy property.

According to a study on the 2015 Montreal mortgage market by JLR,¹a Montreal-based firm specializing in real estate transaction analysis, 15% of buyers did not need financing to purchase their homes. If we include condos, which are popular among retirees, 17% of buyers paid cash in 2014.

If you find yourself in the position to pay for a house in cash, it’s best to ask the right questions to make an informed decision.

Paying cash: More than meets the eye

If you pay for your house in cash, you can forget about making monthly mortgage and insurance payments. This can take the edge off if you don’t have a steady income or you lose your job. Also, you’ll have a lower debt-to-income ratio, making it easier to take out another loan if you need one.

But since nothing is completely black and white, it’s important to weigh other possibilities and alternatives before you decide to pay in cash.

Opportunity cost: Putting all your eggs in one basket

When it comes to investing, diversification is key. If you invest everything in your home, a major part of your net worth is tied up in a fixed asset.

Historically speaking, the real estate market has been relatively stable, but it could be a good idea to diversify your asset classes if most of your money is invested in your house. If you keep your mortgage at current interest rates, you could explore other investment options while keeping the home you want.

Risk of insufficient liquidity

If you invest all of your cash in your house, you’ll need to borrow again in case of any emergencies. Several investment options let you earn interest with easy access to funds if you’re ever in a jam.

So, before you write off a mortgage, be sure to weigh all your options.

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