Friday, June 22

The pros and cons of paying cash for a property

Google+ Pinterest LinkedIn Tumblr +

When one pays cash for a home it is the same as investing it at the current home loan interest rate.

Prevailing advice in the face of the rising cost of living often goes along the lines of: “Cash is good, and credit is bad”; “Pay off your debt and don’t take out new loans”; and “Save for things you want until you can pay cash for them.”

It is not surprising that many people think it would be a good idea if they could pay cash when buying a home instead of taking out a home loan.

Gerhard Kotzé, managing director of RealNet Holdings, says prospective buyers also need to consider the potential disadvantages of this approach.

“A cash purchase eliminates the need to pay thousands of rands in interest on a home loan over 20 years, and cuts out the bond registration fee, although you still have to pay transfer duty and legal fees. Paying cash is also likely to make your offer to purchase more attractive to sellers because they don’t have to worry that you will back out if you don’t qualify for a home loan.”

This, he says, may even enable one to buy a house at a discounted price, especially if it is an urgent sale. In addition, buying a home for cash will usually shorten the transfer period and enable you to take occupation sooner.

However, buying a property for cash will probably mean the buyer is tying up most of their capital in one asset and could lose the option of being able to access it in an emergency, or investing it more profitably.

Kotzé says when one pays cash for a home it is the same as investing it at the current home loan interest rate – and when rates are low, one might feel they could get a better return on the cash by investing in shares or commodities, for example, although the risk will also be higher.

“You also need to consider that you are sacrificing liquidity, so it’s probably a good idea to buy a home with cash only if you can afford it without emptying your emergency fund. A property can take months to sell, and if you need cash urgently, borrowing against the value of your home is usually tricky unless you have a bond.”

Kotzé says it is also important for cash buyers to keep an eye on their credit record.

“Not having a home loan could prevent you from obtaining one for a future property purchase as there will be no history of regular and responsible repayment.”

Furthermore, if the market turns downwards and property prices fall, the buyer will carry the whole loss.

“If you have a home loan, you will suffer a loss only on the portion of the purchase price you paid as a deposit and have paid off since.”

Kotzé says paying all cash will work for some people but not for others, and the best compromise is usually to pay a large deposit to reduce the size of the home loan needed and thus the interest due, while still keeping some cash free for emergencies and other investments.

“This would also improve your chances of being approved for a home loan – and the best available interest rate.”

Like us on Facebook

Property360

Share.

About Author