Should you buy a home by paying in cash or with the help of a mortgage? This is a question that may arise if the buyer has the financial means to pay for the property upon completion of the transaction— something that occurred in Spain in 56% of cases. Each option has its pros and cons, although this recent surge in “cash-only” purchases is due to factors such as current high interest rates on loans and the increased savings capacity households had during the pandemic.

In any case, for those who cannot afford to pay for their home in a lump sum, bank financing is not the only viable option. That’s why, today at Culmia, we want to talk to you about the options available for buying a home without a mortgage and how they can help you finance the purchase with some ease.

Options for Buying a Home Without a Mortgage

Even if we don’t have all the necessary funds right away and don’t plan to apply for a mortgage from our bank, we can still hope to purchase a new or pre-owned home. This is a plausible scenario if we expect to have the money available in the near future or if we have financial support from a family member or friend.

Therefore, below we will explore the options available for buying a home without a mortgage.

Sales with Deferred Payment

If there is a high degree of trust between the seller of the property and the buyer, the two parties may reach an agreement under which the seller agrees to transfer ownership of the property after the buyer pays a certain amount—which, in this case, is not equal to the total cost of the property. In this way, the remaining amount is to be paid in installments, as agreed by both parties.

This is an interesting option for cases in which the buyer does not have the necessary liquidity to complete the sale at the outset, but does have enough money to convince the seller to accept the deal and be willing to receive the remaining amount in future installments.

In this case, the seller may retain possession of the property until the buyer pays a specific portion of the purchase price or pays it in full. Alternatively, the seller may hand over the keys at the outset, so that the other party can begin to enjoy the property even though they have not yet paid the full purchase price.

Aspects of a Sales Contract with Deferred Payment

Given the nature of this agreement, it is standard practice for the two parties to sign a contract in the presence of a notary public, who will certify the agreement. During this process, a public deed of sale may be executed, and the property may be registered in the buyer’s name in the property registry.

By formalizing this contract, both parties will have legal safeguards for the transaction, because problems may arise during the process:

• On the seller’s part, the home may be foreclosed upon if the seller has debts.
• On the part of the buyer, due to failure to pay the total price of the property.

In fact, it is common for a deferred-payment sales contract to specify the possible grounds for termination under the Civil Code. Primarily, this includes failure to pay for the property as initially agreed; in such a case, the property must be returned (if the buyer was already occupying it).

Precisely to avoid problems like these, the seller can include certain guarantees. One such guarantee is a retention-of-title agreement, under which the seller retains ownership of the property until the purchase price has been paid in full. Another is to require the buyer to have a joint guarantor who signs the contract and agrees to pay the debt if the buyer is unable to do so.

Tax Treatment of Sales with Deferred Payment

This system for buying a home without a mortgage involves three taxes, two of which are paid by the seller and one by the buyer. Let’s take a look at them here:

• For the seller, the transaction is taxed under personal income tax as a capital gain, which is calculated by comparing the purchase price and sale price of the land. The advantage is that the seller may request that this gain be allocated proportionally over each tax year based on the payments received. And this won’t be the only tax, because the seller will also have to pay municipal capital gains tax once the sale is finalized and the property is handed over.
• For the buyer, the tax liability will consist of the Property Transfer Tax (ITP). If applicable, this tax must also be paid on the day the deed or contract for the transfer of the home is executed.

Lease-to-Own Housing Program

If the buyer needs some time to come up with the money or make a final decision, they can choose this option to buy the house without a mortgage. Basically, it is a type of lease agreement that gives them the right to purchase the home during the stipulated period and at the price agreed upon by both parties.

For the duration of this contract, the landlord agrees not to transfer the property to another person and to honor the rent specified in the contract, regardless of any changes that may occur in the market. Furthermore, if both parties agree, there is also the option to apply the rent payments made toward the total price at the time the property is transferred.

This way, the tenant can enjoy the home under the terms of the lease and , at the same time, retain the right of first refusal to purchase it in the future if they so desire and have the financial means to do so. This allows them to take their time and experience the propertyfirsthand so they can make the best possible decision.

A loan or gift of money from a close friend or relative

The third way to buy a home without a mortgage involves at least one other person. This could be one or more family members, such as parents, or a friend or close acquaintance. In any of these cases, the buyer can obtain the money through a gift or a loan.

Let’s take a closer look at the difference between these options.

Money Loan

Lending money between individuals is similar to a mortgage, with the difference that the buyer assumes a debt owed to another person. As a result, the advantages may include better financing terms than when a bank is the lender, as well as lower costs and taxes.

Since a large sum of money is being lent, it is advisable to draw up a private agreement between the two parties (whether or not interest payments have been stipulated) and even to involve a notary if you want to ensure full protection. Of course, this will depend on the level of trust between the lender and the borrower.

The contract must specify the repayment term and whether the loan will accrue interest. Since this loan is between private individuals, it is subject to Property Transfer and Documented Legal Acts Tax. To this end, it must be registered with the tax authorities using Form 600 from the AEAT; this will clarify the transaction and distinguish it from a gift. This is important because, although it must be reported, the family loan is exempt from tax at the time of its creation—unlike a gift.

In addition, it is important to note that if the lender collects interest, they must report it on their income tax return; meanwhile, the person paying the interest will have the option to make a withholding payment.

Cash Donation

The alternative to lending money between individuals is a donation. The difference between the two is clear: in this case , the donor gives the money selflessly and free of charge, with the recipient’s acceptance and without any obligation on the recipient’s part to repay it. Nevertheless, it is still advisable for the parties to draw up a notarized deed to document the amount donated and the bank accounts used.

In this case, monetary gifts are subject to Inheritance and Gift Tax regardless of the amount, the intended use of the money, or the recipient. However, it is important to keep two things in mind: first, there are different tax rates depending on the relationship between the two parties; and second, each Autonomous Community sets its own requirements.

Thus, tax breaks are typically granted for first-degree relatives (from parents to children) or based on the intended use of the funds, such as the purchase of a primary residence. This is why it is important for the recipient to be properly informed and pay the gift tax within 30 days of receiving the money, after declaring it using Form 651 from the Tax Agency.

Finance Your New Home with the Help of Our Tips

As you’ve seen, these four options for buying a home without a mortgage allow you to buy time to secure financing or even enjoy significant advantages over a bank loan. However, unless you receive a gift, sooner or later you’ll have to pay the full purchase price.

That’s why, at Culmia, we recommend that you download our “Guide to Financing Your New Home.” It includes information, tips, and recommendations to help you navigate the purchase of your first home and ensure that financial considerations don’t become a problem throughout the process.

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