Cash vs Mortgage for Home Buying
Buying a house with a mortgage is a significant financial decision that requires careful consideration. While a mortgage can help make homeownership more accessible, it also comes with its own pros.
Buying a house with cash may seem ideal for avoiding mortgage debt, but you should consider factors before making a decision.
Can you buy a house with cash?
You can buy a house with cash if you have enough funds, and it's not exclusive to the wealthy. 1 in 3 Aussies own their homes debt-free, and 1 in 5 households own multiple properties according to ABS. You can free up funds by selling an existing home, holiday home or investment property.
Buying a House with Cash
The buying process is similar for cash buyers and those with a home loan, but there may be slight differences. As a cash buyer, you can act quickly, but it's still important to conduct pre-purchase checks, like pest and building inspections. After reaching an agreement with the seller, pay a deposit and exchange contracts.
Settlement transfers property ownership to you. The seller's agent or conveyancer may ask for proof of funds. Cash sales are rare, so verify payment methods with the bank and seller before settlement. Bank cheques or other payment methods may be required if daily transfer limits are in place.
Buying a House with Cash: Pros and Cons
Deciding whether to buy a house with cash or take out a mortgage involves weighing the advantages and disadvantages of each option. Here's a breakdown of both.
Advantages of Buying a House with Cash
- Better Negotiating Power: With cash in hand, you may have more bargaining power in the negotiation process. This is because your offer is a sure thing for the seller, who doesn't have to worry about loan approval or waiting for a mortgage.
- Lower Upfront Costs: As a cash buyer, you may be able to save on upfront costs such as mortgage registration charges and loan application fees.
- Debt-Free Ownership: Buying a house with cash means you won't have to worry about making mortgage payments and can potentially save on interest costs in the long run.
- 100% Home Equity: By paying with cash, you'll have 100% home equity from day one, which can be a valuable resource for future investments.
- No Guaranteed Price Discount: It's not a given that paying with cash will result in a lower sale price. The final sale price is usually more important to the seller than the payment method.
- No Stamp Duty Savings: Paying with cash doesn't entitle you to any savings on stamp duty costs.
- No Lender Valuation: Without a lender's valuation, it's important to do your own research or hire a professional valuer to determine the market value of the property you're interested in.
- Tying Up Cash Resources: Buying a house with cash could mean investing all or most of your savings into one property, which could leave you strapped for cash in case of emergencies.
- Lost Investment Opportunities: By putting all your cash into a house, you may miss out on other investment opportunities that could yield a higher return on your money.
- Difficulty Obtaining Home Loan Approval: If your credit score is low or other factors make it hard for you to get a home loan, paying with cash can be a solution.
- Avoiding Additional Debt: If you prefer to live debt-free, especially in retirement, buying a house with cash can be a good choice.
- Unaccepted Properties by Lenders: Some properties may not be eligible for a home loan, such as small apartments, homes on risky land, rural properties, or houses with structural defects. In these cases, paying with cash may be necessary.
- Affordability: A mortgage allows you to purchase a more expensive home than you could with cash, by spreading the cost over a longer period of time.
- Tax benefits: The interest paid on a mortgage is tax deductible, which can lower your taxable income and potentially save you money on your taxes.
- Forced savings: Making regular mortgage payments can help build equity in your home, increasing your net worth over time.
Disadvantages of Buying a House with Cash
When to Buy a House With Cash
There are situations where paying with cash may be the best option, such as:
Should I Buy a House with Cash?
Buying a house with cash has its benefits, such as debt-free ownership and 100% home equity. However, it's important to consider the potential drawbacks, such as tying up cash resources and missing out on investment opportunities. Weigh the pros and cons before making a decision and ensure you have enough savings to handle unexpected expenses.
Should I buy a house with a Mortgage?
Buying a house with a mortgage is a significant financial decision that requires careful consideration. While a mortgage can help make homeownership more accessible, it also comes with its own set of pros and cons. The following are the key advantages when buying a house with a mortgage: