Should you pay cash for your home?
Many buyers feel buying a home for cash is better than taking on a home loan, but this is not always the case.
Cash is good, and credit is bad. Pay off your debt and don’t take out new loans. Save for the things you want until you can pay cash for them.
This is the prevailing advice these days as many SA households wrestle with the ever-increasing cost of living.
So 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.
But prospective buyers also need to consider the potential disadvantages of this approach. A cash purchase of course 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 will 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 might even enable you to buy the 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 that you are tying up most of your capital in one asset and that you could lose the option of being able to access it in an emergency or investing it more profitably.
Also read: Tips for buying a property to renovate
When you pay cash for a home it is the same as investing it at the current home loan interest rate and when rates are low, you might feel that you could get a better return on your cash by investing in shares or commodities, although your risk will also be higher.
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.
You need to consider that if the market turns downwards and property prices fall, you 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.
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.
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