Buying a home with a mortgage comes with many hoops to jump through, but is buying a home with cash any better?
According to Savills, cash sales are 32% higher than the three-year average before the pandemic. The report also shows that the average cash buyer buys a home with £368,600. At the same time, mortgage buyers’ average homes are £302,500.
If you’re considering owning a home as a cash buyer, there are a few factors you should think about before you make any payments.
What Are The Pros And Cons Of Cash Sales?
Before you decide to pay for a home without a mortgage, it’s crucial to consider both sides. Understanding the pros and cons of paying cash for a home will help you decide on your next purchase.
Pros
Cash Buyers Are More Likely To Win In A Bid
The UK property market is competitive, and being a cash buyer will give you a leg up over mortgage buyers. In addition, many sellers prefer to work with cash buyers because they are typically smooth- buyers don’t have to wait for approval, and sellers don’t have to worry about the process ending abruptly.
Cash Sales Are Quick
Since cash buyers do not require a mortgage approval, the process is quicker. Sellers love this, as it cuts down their selling timeline and allows them to move quicker.
Cash Sales Entails Zero Interest & Lender Fees
A major perk of buying a home with cash is that you don’t worry about interest rates as there is no mortgage. Cash sales save you several pounds on interest rates.
For example, let’s say you purchase a home with a 20-year loan for £250,000 with a 2.5% interest rate. Assuming there are no late payments and you can pay back after 20 years, you would have paid £67,941 as interest. With cash sales, you avoid this loss altogether.
Mortgage buyers usually have to pay valuation fees for lenders to ascertain if a property is worth the price they intend to borrow. Valuation fees cost an average of £250-£1500 depending on the property involved. There is also product fees with a mortgage – a cost that a lender charges to make a mortgage happen on their side. An on top of this, lenders spend a great deal of time working out how big a loan is in comparison to the value of the property, the loan to value ratio.
So skipping this process will save you more money than you realize.
Cash Sales Give You Complete Control
Another excellent reason to purchase a home outright is the control you get. You can rent out without waiting on approval from the lender. Plus, it offers a more significant profit margin.
If you’re looking to purchase a property strictly as an investment, cash sales are the best decision because you don’t have to seek consent from a lender.
Cash Buyers Get Great Opportunities – Below Market Value
One of the significant advantages cash buyers have over those who need to borrow is the options they can pick from. For example, many properties require repairs before they are good enough to live in. And if you are willing to fix these issues, a cash buyer can purchase them below their market value.
However, a lender will not approve a mortgage when a home is in an unacceptable condition, so this drives away any competition from mortgage buyers. Homes that need fixing are profitable for cash buyers if they are willing to put the work in.
Cons
Cash Sales Involve Other Expenses
Cash sales allow you to bid for below market value homes homes at a lower price. However, many people do ignore the additional repair costs that come with purchasing a below market value home. Some homes require changes to wiring, plumbing, structural issues, legal issues, planning consent and a hole host of others.
Cash Buyers Can Overpay
In addition, without a mortgage, there will be no lender to verify the value of a property. Hence, you may end up overpaying. Plus, without the proper surveys and checks that allow lenders to flag any issues within a property, you may end up with a home that needs extensive repairs.
If you’re buying a home with cash, it makes a lot of sense to get a professional survey done.
Cash Offers Are Less Compared To Mortgage Offers
Sellers of homes will typically choose the option that offers the highest, most reliable price. And many cash buyers mainly offer prices that fall far below the asking price (especially buyers looking for discounts). As a result, many sellers may not consider cash sales as the best option.
Properties With A “Cash Buyers Only” Sign May Not Always Turn Out Great
You may think purchasing a cash buyers-only property is the perfect seamless buying process. However, this isn’t always the case. Cash-only sales might indicate something wrong with the property, making it difficult for mortgage lenders to lend on.
Below are some reasons why a property may be labeled as cash buyers only;
- The property may be unmortgageable: Structural damage and a high risk of flooding are the common reasons that prevent lenders from lending on a property.
- The seller needs to release equity urgently: Property owners need to access the money tied to the property.
- Tenants currently live on the property, and the landlord may be in dispute with them.
- The property is being sold at an auction.
- The property needs extensive work (mostly inherited properties).
- There are legal complications associated with the property, potentially with the title.
Although it isn’t always a bad decision to invest in properties like these, you need to be aware of any risks. Since home surveys by a lender aren’t possible, you might end up with a property that later becomes expensive to fix.
You also ned to be aware of other signs that a home is not selling for it’s top price, like when the estate agent marks it with an OIRO tag.
Cash Sales Lead To Loss Of Liquidity
Purchasing a home with cash means investing a considerable amount of money in a property. Although this may be a wise financial investment, your money may be tied up for a long time. Hence, you need to ensure you will not need the cash you put forward for home.
Need To Show Proof of Funds
Whether you’re buying a home with a loan or cash, you will need to show proof of funds. However, unlike a mortgage where the bank is considered your proof of funds, cash sales can be tricky. You can’t purchase a home with a briefcase full of money.
Instead, you could provide evidence such as bank statements, pension statements, inheritance, receipts showing the sale of a property, etc. It’s essential to show proof of funds to comply with the anti-money laundering regulations.
Summary
Buying a home with cash is straightforward, quick, and comes with many benefits. You don’t need to pay interest spread across several years, and there’s the opportunity to make some money on a rennovation.
However, as a cash buyer, you need to perform your checks on a property before closing any deal and be aware of what you are getting into.