realADVICE: The pros and cons of cash purchases
PUBLISHED 11 MAY 2018
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. However, there are also potential disadvantages to doing this.
“A cash purchase eliminates the need to pay hundreds of 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 about a buyer backing out if they 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.
But buying a property for cash could also 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.
Paying cash for a home is the same as investing it at the current home loan interest rate – and when rates are low, you might be able to get a better return on your cash by investing in shares or commodities, for example.
Additionally, says Kotzé, you are sacrificing liquidity, so it's probably a good idea to buy a home with cash only if you can afford it without emptying your emergency fund. A property can take months to sell, and if you need cash urgently, borrowing against the value of your home can be very tricky unless you have a bond.
Strange as it may sound, it is also important for cash buyers to keep an eye on their credit record. Not having a loan could prevent you from obtaining one for a future property purchase as there will be no history of regular and responsible repayment.
And finally, 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.
In short, he says, paying all cash will work for some people but not for others, and a good compromise might be 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. This would also improve your chances of being approved for a home loan – and the best available interest rate.