Pros and cons of pay­ing cash

George Herald - Private Property - - Property News -

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 South African 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, says Ger­hard Kotzé, MD of es­tate agency group Real­net Hold­ings. "A cash pur­chase, of course, elim­i­nates the need to pay thou­sands of rand 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.

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, for ex­am­ple, al­though your risk will also be higher.

You also need to con­sider that you are sac­ri­fic­ing liq­uid­ity, so buy­ing a home with cash is a good idea 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 is usu­ally tricky un­less you have a bond.

Strange as it may sound, Kotzé notes, 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."

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 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. "This would also im­prove your chances of be­ing ap­proved for a home loan - and the best avail­able in­ter­est rate."

Is­sued by Real­net

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