If you have won the Lotto, or are just really good at saving, there are many reasons why buying a home with cash is a good idea – of course, there are also disadvantageous.
These include forgoing tax benefits and tying up a substantial amount of hard cash in a fixed asset for a long period of time.
Many buyers, particularly investors, do buy without a home loan, and one of the key advantages of this is that the buying process is sped up quite significantly; a cash offer-to-purchase deal can be closed in just a few days.
Jackie Smith, head of Buyers Trust, a subsidiary of ooba Group, says the process of buying a home in cash closely resembles that of purchasing a home via financing, although there is no need for a credit check. Instead, the buyer is required to show proof of funds.
“This can be done by obtaining a verified letter from the bank that shows you have the necessary funds at your disposal, but this option comes at a significant cost.
“Alternatively, there are other more cost-effective ways of proving that you are ‘good for the cash’ such as by opting to use the Buyers Trust platform which issues you a free bank guarantee. A bank guarantee serves as an official promise to the seller that the buyer’s financial obligations will be fulfilled.”
Advantages of buying a property with cash
1. You won’t have to pay interest on a home loan
The interest accrued over the course of a 20- or 30-year bond is substantial when totalled up, but buying a home in cash exempts you from both this and the stress of fluctuating interest rates.
“You can however be paid interest during the property transfer process by entrusting your deposit to a maximum interest-bearing account...”
2. More bargaining power
Offering to buy a home in cash automatically makes yours the most attractive offer on the table, because of the lowered risk of the deal falling through, thereby appealing to motivated sellers, she says.
“Because it simplifies the sale process, sellers who want to sell their property quickly may be willing to accept a cash offer lower than asking, allowing you to negotiate.”
3. No credit checks
For those with a spotty financial history, the prospect of undergoing a credit check, as is required when applying for a home loan, may not be appealing. However, if you have the funds available outright, there is no chance of your home purchase being rejected due to a low credit score.
The disadvantages of buying a home with cash
1. No liquidity
If all your money is tied up in a property, you will be left high and dry in the case of an emergency or if you need to fund another purchase.
“While you may be saving on monthly bond repayments in a high interest rate environment, property doesn’t offer the same return on investment as stocks or commodities in the short-term,” Smith states.
2. You lose out on tax benefits
Should you be purchasing the property for the purpose of renting it out, buying in cash won’t qualify you for the same tax-deductible benefits that come with bond interest repayments.
3. Property is a risk
Smith explains that property is an investment, and as with any investment, there is risk involved.
“The property market is constantly in flux, and should you need to sell in a low property price environment or a buyer’s market, there’s a chance you could make a loss.”
4. Not building credit history
For those looking to strengthen their credit score and history, taking out a home loan and making monthly repayments in a timely fashion is an indicator to lenders that you are a low credit risk.
“Having a low credit score will put you at a disadvantage should you need a loan in the future to make a large purchase, such as another property,” she says.
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