In this brief guide, we are going to discuss the pros and cons of buying a house with cash.
For a lot of us buying a house with cash is simply not an option because we do not have the capital required to purchase a house in cash.
House prices are also rising higher and higher in the UK.
The average house prices in some regions are reaching as much as £500,000.
For those who have the capital required to buy a house in cash, they should carefully consider the pros and cons of such a decision to ensure they have put themselves in the best financial position possible.
What is a cash buyer?
A cash buyer is someone who has the cash to buy a house. This does not mean someone who is dependent on selling their house to get the cash or getting the cash through the use of a mortgage.
Cash buyers can be very sought after when the real estate market is illiquid due to high mortgage rates or a bad economy
Pros of buying a house with cash
There are some obvious instant pros of using cash for buying a house such as:
- Cash means you can complete on the home transaction a whole lot faster- often buy to let investors will use this so they can finalise on investment transactions as quick as possible.
- Cash is much more attractive to a lot of home sellers as they don’t have to wait for a potential buyer to get a mortgage and potentially get rejected.
- Another pro of buying with cash is that you won’t have to pay any interest on a mortgage.
- By buying a property with cash you won’t have to abide by the mortgage lenders rules and hence you can get any property which you want.
- Another pro of buying a house with cash is that you won’t have to get home insurance by default. Most mortgage lenders insist you get home insurance as part of the terms of your mortgage agreement.
- By buying a house with cash you won’t need to stick to the mortgage lenders 6 months (no sale rule) and you will be able to sell your house within 6 months so you can extract the equity and use it on any other future investments.
- Another pro of buying with cash is that you won’t have to go through a mortgage application process which can take several weeks and have huge mortgage fees associated with it.
- Paying with cash also means you won’t have to use a mortgage broker which can charge as much as 1% of the mortgage balance as a fee.
- Paying with cash also means you won’t have to go through a mortgage affordability check without knowing if you will be successful with your mortgage application or not.
- Paying with cash can also be advantageous for those with bad credit, complex incomes or those who are self-employed and will struggle to get competitive mortgage rates.
- Paying with cash also means that you won’t have to struggle down the line if your finances go bad. For example due to a redundancy
- Paying with cash also means you are able to extract equity from your property further down the line if you need to borrow money for home improvements, new property investment or similar.
- Paying with cash also means you may be able to avoid all other associated costs of buying with a mortgage such as conveyancing fees mortgage valuation fees.
- Another pro of paying with cash is that you can potentially negotiate a lower sale price with the seller due to the flexibility and speed you will offer them.
- Another main pro of paying with cash is that the sales process could be significantly faster.
- Paying with cash can also offer you better returns when taking into account the capital appreciation and then comparable returns you may get with a savings account.
- Getting a mortgage on an unencumbered property is usually easier.
- A major pro of paying with cash is that you have a sense of security that the home is yours regardless of whatever happens.
- Buying a house with cash also means the property sale is less likely to fall through and more likely to go through as there are fewer uncertainties with being required t get a mortgage.
- Another pro of buying with cash is that you will reduce the number of property chains in the sales transaction and hence reduce the amount of time it takes to complete the sale. Research by the HomeOwners Alliance found that one in five sales collapsed after a sale further up the property chain fell through.
- Buying a house with cash can also make your offer more competitive than other buyers and hence increase the likelihood that your offer on the house will be accepted.
Cons of buying a house with cash
There are some obvious instant cons of using cash for buying a house such as:
- An obvious con of buying with cash is that you utilize such a large capital and this may leave you financially vulnerable
- Another obvious con of buying with cash is that you won’t be able to utilize that capital in any other investments which may come up at short notice.
- Another con of buying with cash is that your money may get better returns elsewhere
- Another con of buying with cash is that if property prices fall you take all the hit. In comparison if you had a mortgage you will only partially be affected with a fall in the equity you already own.
- Buying a house with cash also means you will have an illiquid asset which may be much harder to sell.
- Another problem with buying with cash is that you will lose 100% of your properties value if your home is destroyed and not adequately covered by insurance.
- Buying a house with cash also means your finance may be poorly diversified. If the housing market was to crash you may lose all of your money.
- By paying with cash you may miss out on any leverage you could have had with your mortgage debt. E.g if mortgage rates were rising and inflation was rising but you were locked into
- Sellers who sell houses and request cash often indicate that something may be wrong with the property.
FAQs; The pros and cons of buying a house with cash
Is buying a house in cash a good idea?
Buying a house in cash may be a good idea as it will allow you to save on mortgage interest.
There are however a host of other considerations you should make before buying a house in cash.
Is it better to get a mortgage or pay cash?
There are many pros and cons to buying a house with cash and there are also several pros and cons to using a mortgage.
There is no way to say definitively which is better and you should consider this.
In this brief guide, we discussed the pros and cons of buying a house with cash.
If you have any comments or questions please let us know.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.