Even if you have enough cash in the bank to be able to buy your next home outright, it might be quite a risky move to do so, says Shaun Rademeyer, CEO of BetterLife Home Loans, SA’s biggest mortgage originator.
“You will need to weigh up the pros and cons listed below, but often homebuyers find that applying for a home loan is a better course to follow – especially if they enlist the help of a professional mortgage originator such as BetterLife Home Loans to simplify and speed up the application process,” he says.
*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 any of the money you would have been paying in a tax free 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 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.
*Buying a home for cash will most likely mean that all the money you currently have – or at least a large percentage of it – will be tied up in one asset, leaving you little 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 take that percentage drop on the whole amount you paid. For example, if the purchase price was R1m and the market drops by 10%, you will have lost R100 000. But if you only paid a R100 000 deposit in cash and the market drops 10%, your loss will be R10 000, with the bank taking 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 sufficient value in the property to justify the purchase price. This will not happen if you buy for cash so you will have no “third party” confirmation that you are not overpaying.
Obviously, how you pay for your home is a personal decision, but you should not decide to do away with a mortgage and part with a large amount of cash on the spur of the moment. You should seek professional help to make a proper assessment of your overall financial situation and long-term investment plans.