Mortgage vs. cash: Which is the better option when buying a home?

Mortgage vs. cash: Which is the better option when buying a home?

Financial Planning | Jul 27, 2021 | 10 min read

The first and foremost question that a home buyer needs to answer is how to arrange the payment amount? Whether a buyer should pay in cash or consider the mortgage route. Both of these payment modes have specific advantages and disadvantages, and a prospective buyer must know about the pros and cons of each payment method. Experts suggest a balanced choice of having both components including cash and mortgage to avoid heavy debt and maintain a good financial backup for other expenses as well.      

Here are few benefits of both payment methods that can help homebuyers in deciding the best mode of payment to own their dream home.   

Benefits of cash payment

The biggest benefit of cash payment is that homebuyers need not pay any interest on the borrowed amount as well as other closing expenses. Banks and lending institutions charge several other fees for mortgage amounts such as processing fees, appraisal fees, etc. apart from interest on the disbursed amount. 

  • Home buying deals with only cash as the component are closed fast, as there is no background check assessment by the bank that causes delay in the process. 
  • Homebuyers paying cash to developers may strike better deal in terms of price negotiations as well as choice of the unit, as developers also show more interest in cash payments. 
  • Cash payment mode eliminates the fixed monthly deduction in form of EMIs, which also have significant interest component linked to it. A homebuyer has to pay for other expenditures after buying a house such as house insurance, maintenance cost, apartment association fees and property taxes etc. In absence of a mortgage loan, a homebuyer can easily manage other monthly expenses.      
  • Buyers also do not need to wait for getting the house registration papers, which are kept by the lending institution until the entire loan amount is settled by the buyer.
  • A home bought through cash payment has no further obligations to any third party i.e. lending institution, and the buyer can sell it any time irrespective of the market conditions.
  • Homebuyers can also save on price hike and compete better over the mortgaged property owners as it take longer to own a house through mortgage lending procedure. 

One should also remember that the higher the amount of cash invested towards the house, the greater is the homebuyer’s equity and ownership in it.

Advantages of mortgage lending  

Mortgaging a property also has several benefits, especially for those homebuyers who don’t have enough cash amount to pay. Mortgaging enables homebuyers to have sufficient financial stability or cash reserves for concurrent future expenses.  

  • Availing a mortgage loan also provides tax benefits to homebuyers in turn saving a significant amount on taxable income. Under IT rules, taxpayers are liable to get less tax deduction for home loan interest payments.    
  • Another significant advantage of mortgaging is that lending institutions initiates intense property verification process, which minimize the chances of illegitimate transactions and homebuyers can sure about the property.
  • By paying entire amount in cash, the money gets locked in the property and one can use only after selling the house. So growth of your money directly depends on property appreciation. In mortgage loan, a homebuyer can invest the cash amount in high return avenues.           

Both modes of payment have their respective advantages and disadvantages. Also, the choice depends on several factors such as availability of cash, monthly income, concurrent expenses, and financial stability of an individual buyer. Apart from that various calculations based on income tax deductions, interest rate benefits, investments and cash reserve requirements also impact the decision of payment for home buying.

*Note: Cash in this article is referred to as savings that have been accumulated by the homebuyer over the years

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