Buying a house with cash vs getting a mortgage

Can you buy a house with cash?

If you have the funds available, it’s certainly possible to buy a house with cash and it’s not necessarily a strategy limited to the uber-rich.

32% of Aussies own their home without a mortgage, according to the Australian Bureau of Statistics (ABS), with one in five households owning multiple properties. Selling an existing home, holiday house or investment property or other investment, could free up the funds needed to buy a house with cash.

How to buy a house with cash

The buying process works in much the same way no matter whether you’re a cash buyer or you need to take out a home loan. But there can be minor differences you need to be aware of.

When you buy a house with cash, chances are you’re in a position to act quickly. Nonetheless, it’s still a good idea to take the time to conduct all the necessary pre-purchase checks on the place, such as a pest and building inspection, which could identify any problems with the property.

Once you and the seller reach an agreed price, you’ll be expected to pay a deposit and exchange copies of the signed sale contracts. From there, the normal process of settlement takes place that transfers the property out of the seller’s name and into yours.

If you’re a cash buyer, the selling agent or the seller’s conveyancer may ask for evidence that you have the funds available to buy the property. Cash sales tend to be the exception rather than the rule, and there have been examples in the past of buyers making a cash offer when it turned out a home loan was needed to complete the purchase.

Make sure you speak with your financial institution and the selling agent to decide how the balance owing on the property should be paid on settlement day. Financial institutions often place daily limits on the value of electronic transfers, so it’s wise to discuss your payment options with your financial institution in advance of the settlement date.

Is it a good idea to buy a house with cash?

If you have the money available, buying a house with cash seems like a no-brainer. It means no debt, no monthly repayments and no interest costs.

But before you hand over what is likely to be a significant amount of cash, it’s worth taking a moment to consider the pros and cons of buying a house with cash.

The pros of buying a house with cash

• The potential to negotiate a good price: When it comes to sealing the deal as a cash buyer, you may have more negotiating power. Without the need to be approved for a home loan your offer is a sure thing for sellers, and this can lead to flow on benefits, including the potential to arrange a shorter settlement period if this suits everyone.

• Savings on upfront purchase costs: As a cash buyer you may be able to avoid a number of the upfront costs of buying a home such as mortgage registration charges and home loan application fees.

• You can own your home debt-free: Paying for a home with cash means you won’t need to budget for mortgage repayments, and you stand to save a bundle in the interest charges that can go hand-in-hand with a home loan.

• You have 100% home equity: You will have 100% home equity from day one. This equity can be a valuable resource as lenders may let you use your home equity to buy a second property with no deposit.

The cons of buying a house with cash

• Don’t assume you’ll score a price discount: Paying for a house with cash won’t automatically see you pocket a big discount on the sale price.

• No discount on buying costs: Paying with cash won’t entitle you to any savings on costs such as stamp duty.

• You won’t have the benefit of a lender’s valuation: When you borrow to buy a home, the lender is likely to conduct a valuation of the property. This gives the financial institution and the homebuyer a fair degree of confidence that the agreed price isn’t above market value. When you choose to buy a house with cash, you won’t have the benefit of this valuation, so it’s essential that you do plenty of research to determine local values. You could also hire a professional property valuer to estimate what the place is worth.

• You are tying considerable cash resources to one asset: As a cash buyer you may be investing all, or most, of your savings into a single property. It’s always a good idea to be sure this won’t leave you strapped for cash if emergency bills arise.

• You could earn a better return by investing the cash elsewhere: Buy a house with cash and you can pocket considerable savings on home loan interest. While that’s a plus for your finances, there could be more productive ways to use the money. By investing the capital elsewhere, you could potentially earn more in returns than you save in home loan interest.

When it can be a good idea to buy a house with cash

There are circumstances when buying with cash may be the ideal strategy.

• You’re struggling to get home loan approval: Lenders look at a variety of factors to decide your eligibility for a home loan. But certain factors, such as having a low credit score, can make it challenging to be approved for a loan with a mainstream lender.

• You don’t want to take on more debt: The decision to buy a house with cash can be driven by personal preferences.

• The property doesn’t pass muster with a lender: Lenders each have their own rules about which properties they’ll accept as security for a home loan. In general though, very small apartments, homes on risky land such as beachfront blocks subject to coastal erosion, rural properties, and houses with serious structural defects can all be no-go zones for home loan lenders.

Should I buy a house with cash?

The decision to buy a house with cash means living without a mortgage—something many Australians aspire to. Whether or not you decide to buy a house outright with cash will depend on your own needs and financial circumstances.

Be sure to weigh up the pros and cons of devoting a large sum of money to paying for a property, especially if this could leave you with very little savings to handle life’s inevitable curve balls. You could also consider seeking out professional financial advice before making your decision.

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