Buying a house for cash is usually quick and fairly easy. Here’s what you need to know about making this real estate move.
Cash buyers have become a driver of the English property market. This is according to financial institution Nationwide’s chief economist Robert Gardner who told the Mirror in March that 35% of property sales are now paid for in cash.
This is thanks, in part, to older buyers downsizing and paying cash for their new properties, after the sale of their bigger homes.
Who wouldn’t want to buy a house for cash? While the prospect may seem tempting if you could, there are few points to consider before whipping out your check book.
Advantages of Buying a House for Cash
The obvious advantages of buying a house for cash are simple: no monthly mortgage repayments and saving money on interest. Accumulated monthly interest will add up to a lot of money which means you’d pay far more than the actual sale price at the end of the day if you were to take a home loan.
What you may not know is: should you be able to, buying a house for cash makes buying a home much easier.
Homeowners love cash buyers because these sales are faster, simpler and less likely to fall through. Not having to wait for financing may give you an edge over other buyers if a home is sought after and might even help you wangle a better deal on the purchase.
Not having to wait on a lender’s approval means your paperwork will go through quicker and you save money on closing costs. This is also a great option if you don’t have a credit record. Buying a house for cash will also help you in the future. You won’t be affected by fluctuations in the housing markets that can turn mortgage repayments on their head.
You’ll also be able to use your already paid for property as equity, should you need to take out a large loan. And should you be wanting to gift your home to your children after you pass away, an absent mortgage will make the title transfer process simpler.
Perhaps the biggest advantage of buying a house for cash is a psychological one. There’s not much that can compare to the satisfactions and security of owning your own home outright.
Other Considerations When you Buy a House for Cash:
Becoming a homeowner is an expensive business and many first time buyers may be unaware of the extra costs they need to take into account.
The National Association of Citizens Advice Bureaux suggests working out these costs when considering how much you can afford to pay for a house.
For the initial purchase, you’ll need to consider survey fees, valuation fees, Stamp Duty Land Tax, land registry fee, local authority searches, the buyer’s solicitor’s costs, VAT and the cost of moving house.
You’ll also need to take running expenses into account. These include council tax, water rates, insurance costs and heating bills. If the property is leasehold, you’ll need to look and ground rent and services charges too.
Financial journalist, Sarah Max writes that the two things buying a house for cash won’t do for you are: maintaining liquidity and maximizing returns. Having a mortgage could free up cash for other investments, but if you take one out after already buying a house for cash, it would be considered a refinance and could come with a higher interest rate.
Depending on interest rates, there’s also the possibility that returns on your capital may be bigger than a mortgage repayment if you were to invest it or putting it in a high interest bearing savings account.
Huffington Post writer Jack M. Guttentag has a handy calculation to help you decide whether to buy a house for cash or not.
Guttentag suggests calculating your net worth at the end of the period for which you’d making mortgage repayments, say 15 years, doing the calculations twice: based on where you’d be if you paid cash versus what your net worth would be if you use a mortgage loan.
A mortgage repayment may also factor in expenses like taxes, so if you aren’t going to remember to pay these yourself, you may need to consider a mortgage.
How to Protect Yourself when you Buy a House for Cash:
Wads of cash, albeit figurative, are bound to attract unwanted situations. Unless you’re a property expert yourself, it’s best to employ one to help make sure you don’t get stuck with a bad deal. Sellers are encouraged to hire a real estate agent to do an appraisal of their property, but so should you.
Mortgages protect you from buying a home that’s not financially viable. If you’re paying cash, you need to thoroughly inspect the proposed property yourself, or with the help of a professional, to ensure you’re not buying something that needs more repairs than you expected.
If the home does need a lot of costly repairs, once possible way to pay for them is by negotiating a short-term lease back option with the current owner. In this way, the owner gets the cash from the sale but leases the property from you while you are fixing it, providing you with a stream of income to pay for parts and labor.
You can also do your homework by checking the price of other similar properties in the area to get an idea of whether the property is well priced, while a real estate lawyer will help you ensure you are happy with the sale and contract.
Financial expert Virginia Wallis recommends building up the money for the purchase in separate, disconnected financial institutions to safeguard it.
Wallis explains the Financial Services Compensation Scheme (FSCS) allows you to claim up to £85,000 in the event of a bank or building society going under, so ideally, you wouldn’t want more than that amount in a single account.
The Bottom Line
Guttentag says it’s the relationship between your mortgage rate and investment rate will be what helps you decide whether paying cash for a house makes sense or not. You’ll need to factor in all the costs involved with the purchase before making your decision.
If you decide to go for buying a house for cash, contact a real estate agency dealing in cash sales to help you find the property that’s best for you.
This blog was written by the property blog, an online resource for all things property.