- #1- Lack of liquidity
- #2 - Negative credit record
- #3 - Property investment risk
Many buyers are under the impression that it will be better to be paying cash for a home instead of taking out a bond and paying it off.
South Africans always hear that cash is king, credit is bad; that you should pay off your debts and don’t take out new loans!
With the ever-increasing cost of living, it is no surprise to see so many people think it’s actually a good idea to avoid the home loan completely and save up in order to buy a house cash.
It is true that a cash purchase eliminates the thousands of Rands in interest that you need to fork out every month for the next 20 years.
And, not to mention the amounts you will save on bond registration fees! (You will, however, still need to pay the transfer duty and legal fees.)
Here are a few more things to consider when buying a house cash:
#1- Lack of liquidity
Buying a property cash means that you are tying your capital to one asset and you could lose the option of accessing it when you find yourself in a pickle.
You’re effectively sacrificing liquidity when buying a house cash! So, this might be a good idea only if you are able to afford it whilst still having funds set aside for emergencies.
A property can take months to sell and if you need cash urgently it might be tricky to borrow money against the value of your home unless you have a so-called access bond.
#2 – Negative credit record
Potential homeowners should already understand what a negative credit record can do to your financial reputation when you apply at banks or other money-lending institutions.
You are waved away and you lose the chance of obtaining the loan you need in order to buy property.
Bonds work in the same way. Just like others encourage you to apply for credit in order to buy a property, you are also encouraged to take out a bond when buying a home.
When you buy a home cash, there is no trace of any credit in property, so when you want to sell it and purchase a new home, you might find yourself in a tricky situation!
There is no proof that you have made regular and reliable payments in order to pay off your home, so getting a loan for a new home will be difficult.
How’s that for a world in reverse?!
#3 – Property investment risk
A property is an investment and with any investment, there is risk involved.
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 need to consider what will happen if the real estate markets turn downwards for longer periods of time, whereby property prices are sliding, just when you have paid cash for your home. You will now carry the entire loss of the price you paid.
However, if this happens and you took out a loan in order to buy your house, then you will only suffer the loss on the portion that you put down as a deposit and the amount that you have paid up-to-date.
All-in-all, paying cash might work for some people, but the best way for most homeowners is to put down a large deposit in order to minimalize the interest paid per month.
This will give your credit rating a boost and you will now have cash available for emergencies.
Never say never. Life happens.