Advice

Cash or credit?

buying cash or credit

Even if you have enough money in the bank to buying cash your next home outright, you should probably think twice before you do

Even if you have enough money in the bank to buying cash your next home outright, you should probably think twice before you do

Using a home loan to buy your home is often a better idea than buying cash, especially if you apply through a reputable mortgage originator who will ensure you get the best possible interest rate, says Gerhard Kotzé, MD of the RealNet estate agency group. No matter what your financial position is or how you choose to buy a property, homebuyers should carefully weigh up the advantages and disadvantages of buying cash before making a final decision, he says.

ADVANTAGES OF BUYING CASH

1. You will save money by not paying interest on a home loan for 20 years. This may seem like an especially attractive proposition, especially if you can invest at least some of the money you save each year into a tax-free savings account.

2. You won’t have to worry about loan approval and you will save on bond registration costs.

3. Your credit record will also not come into question, which could be a factor if you’ve had some financial trouble in the past that may prevent you from securing a loan.

4. You will have 100% equity in your home, which should be accessible if you need money for an emergency. You may also find personal satisfaction in owning your home ‘outright’.

5. You will be an attractive buyer to serious sellers, and the prospect of being able to conclude a faster, simpler deal means you could negotiate a better price.

DISADVANTAGES OF BUYING CASH

1. You will lose liquidity. For most people, buying cash a home could mean that all the money they have – or at least a large percentage – will be tied up in one asset, leaving little to spare for other investments, savings or emergencies.

2. If you only want to invest in property, you should seriously consider spreading your risk by using your cash to put down deposits on two or more homes and obtaining a loan for the remainder of the purchase price in each case. There could also be tax benefits in owning one or more rental properties, as well as the possibility of better returns on your capital.

3. You will have no gearing protection. If all your money is in your home and property prices drop, you will suffer that percentage loss on the whole amount you paid. For example, if the cash purchase price was R1m and the market were to drop by 10%, you would lose R100,000 worth of value. But if you obtained a loan and only pay a R100,000 deposit in cash, your loss, should prices drop by 10%, would only be R10,000, with the bank bearing the loss on the remainder.

4. Property can take weeks or months to sell, which can become a real problem if you need money quickly. Even trying to raise a home loan against your paid for property can take far too long if you have a serious emergency.

5. No bank valuation. When you apply for a home loan, the bank will usually send a valuator to see that there is sufficient value in the property to justify the purchase price. This will not happen if you weren’t buying cash the property, so you will have no ‘third party’ confirmation that you are not overpaying on your property.

Obviously, says Kotzé, the decision about how to pay for your home is a personal one, but you should not decide to do away with a bond and part with a large amount of cash on the spur of the moment. “You must seek professional help to make a proper assessment of your overall financial situation and long-term investment plans before you make such a major move,” he says.

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