Picture: Gerhard Kotzé, MD of the RealNet estate agency
Even if you have enough cash in the bank to be able to buy your next home outright, you should probably think twice before you do.
That’s the word from Gerhard Kotzé, MD of the RealNet estate agency group, who says that using a home loan to finance the purchase is often a better way to go, especially if buyers apply through a reputable mortgage originator that will make sure they are offered the best possible interest rate.
In any case, he says, they should carefully weigh up the following advantages and disadvantages of cash purchases before deciding:
Advantages of cash purchase
- You will save money by not paying interest on a home loan for 20 years. This may seem like an especially attractive proposition if you can then invest at least some of the money you save each year into a tax-free savings account.
- You will avoid having to worry about being approved for a loan – and the bond registration costs.
- Your credit record will also not come into question – which could be a major factor if you have had some money trouble in the past that you think might prevent you from being able to secure a loan.
- You will have 100% equity in your home, which you should theoretically be able to access if you need money for an emergency – and you may find personal satisfaction in owning your home “outright”.
- You will be an attractive buyer to serious sellers, and the prospect of being able to conclude a faster, simpler deal may even enable you to negotiate a better price.
Disadvantages of cash purchase
- You will lose liquidity. For most people, buying a home for cash will most likely mean that all the money they currently have – or at least a large percentage of it – will be tied up in one asset, leaving little to spare for other investments or savings or emergencies.
- 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.
- You will have no gearing protection. If all your money is in your home and property prices drop, you will suffer that percentage drop on the whole amount you paid. For example, if the cash purchases 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 10% would only be R10 000, with the bank bearing the loss on the remainder.
- Property can take weeks or months to sell, which can be a problem if you need money quickly. Even trying to raise a home loan against your paid-for property can take too long if you have a real emergency.
- No bank valuation. When you apply for a home loan, the bank will usually send a valuator to see that there is enough value in the property to justify the cash purchases price. This will not happen if you buy for cash, so you will have no “third party” confirmation that you are not overpaying.
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 really 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.”
According to Wessel de Kock of Snymans Attorneys, the general sentiment is that a cash purchases is always a better option when buying property. However, there are many factors to be considered before putting pen to paper.
“One of the most appealing advantages of buying a property for cash is the fact that no interest will be paid on a home loan, which over a typical home loan duration can amount to a significant sum. Many purchasers feel this allows for more flexibility on a monthly basis as no repayments need to be considered.
“Further, there is no need to worry about financing being approved which can often be a stressful and time-consuming process. Your credit record will have no bearing on your ability to purchase the property and no bond registration costs will be due,”De Kock said
The prospect of a cash transaction can also be a more attractive option to serious sellers. Often a cash purchases can result in a smoother and faster process as the purchase relies on fewer conditions. Since a seller might see this as an advantage, the buyer may also be able to negotiate a better purchase price.
According to De Kock it is worth noting though, that a buyer will be liable to pay the full purchase price into the transferring attorneys trust account in accordance with the offer to purchase, and a guarantee will be issued to this effect. This means that a purchaser must have access and means of transferring this substantial sum of money when required.
Potential disadvantages of buying your home for cash
It holds true that buying cash might mean that a large portion of your savings or cash reserves will be tied up into one asset which can cause problems if an emergency arises. A property can take months to sell and register in the new owner’s name, leaving one cash strapped in the interim. Raising a mortgage bond against your property in this instance can take some time causing unwanted pressure.
“While purchasing cash might work for some, it may not for others. There is a possible middle ground where a buyer can spread the risk by opting for a small mortgage. Not only does this approach leave you with some cash liquidity but also gives you the chance of being approved for mortgage finance with the best available interest rate.
“Before a decision is made regarding purchasing cash or not, all opportunities and consequences should be discussed with an expert, such as a mortgage originator who can provide valuable insight into financing a property,” De Kock advises.
Written by Danie Keet, originally published in Property Professional