Many ask me what I think of mortgages and whether I would advise them to take a mortgage. There is a way to evaluate your options to know which option fits your financial situation. There is no straight answer to such a question. Here’s what you should know, in the simplest and shortest form.
Immediacy
Mortgages put the house in your hands immediately. Once you obtain the mortgage and it’s paid to the property owner, you become the owner of the property, at least in possession, pending the total repayment of the mortgage. Savings however, will not place the property in your possession unless at a time (future) it is enough to buy you the property.
Interest
The crust of this question has to do with the rates between the two; mortgage and your savings. If you can invest your periodic payments in assets (investments) that yield returns higher than the rate on the mortgage then it will be better to use your savings – if time is not a consideration for you.
This means that effectively, you would be able to contribute or save towards the same mortgage value needed to acquire a home but in a shorter period than the tenor of the mortgage, because you’re investing funds at a higher rate. For example, if you’re taking a mortgage at a rate of 8% and paying $800 in monthly installments, you could rather invest the $800 monthly at a rate of say 10% (if such investments are available), which would yield the same value of the mortgage in a period shorter than the period required of you to make the $800 monthly towards the amortization of the mortgage.
If you cannot invest your savings at a rate higher, then purely based on this argument alone, without considering the time frame, you would have to take the mortgage.
Ideal Period
What period is ideal is a matter of personal preference. For some, 3years is too long to wait till a periodic contribution yields a specific amount, and for others, 5years is short enough to wait.
I am sure by now you know which option to take. Like I mentioned earlier, it’s purely based on individual financial and non-financial circumstances, but now you have the pointers to help you in your decision.