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 for a house instead of taking out a home loan.

But prospective buyers also need to consider the potential disadvantages of this approach, Gerhard Kotzé, MD of estate agency group RealNet Holdings. “A cash purchase of course eliminates the need to pay 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.

If you pay cash for a house it 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, he says, if you pay cash for a house it 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 house 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 it’s probably a good idea to pay cash for a house 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.”

So, Should i pay cash for a house?

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” If you pay cash for a house, in the form of a deposit, you will and the best available interest rate.

For more stories like this, Get Estate Life Magazine for free

Latest…