While the majority of buyers will purchase their properties with the assistance of a mortgage, some are able to do so without – making them cash buyers.
Well, not exactly…
The official meaning of ‘cash buyer’ is someone who has money in place ready to pay for a property at the point when they make an offer.
So, if you are selling your home and buying your next one with the proceeds, technically you aren’t a cash buyer until your property has sold – despite not needing a mortgage for the next one.
There are advantages to being a cash buyer, not least that you shed the burden of monthly mortgage payments.
But in some cases, it can actually pay to have a mortgage rather than buy with actual money.
Buying a house with cash
As well as meaning no mortgage payments, buying a property in cash also comes with other benefits…
Your purchase is less likely to fall through
According to the HomeOwners Alliance, around one third of property sale collapses are down to buyers not being able to raise the required funds.
More often than not, that will be due to mortgage funds not being available, perhaps due to the buyer’s circumstances changing or because of a change in lending criteria.
Cash buyers have no such issues, so are hugely attractive to sellers who need a sale completed quickly.
There’s no complex chain
Cash buyers don’t have a property to sell, so are immediately in a great position to move quickly – something all buyers and sellers want but so rarely get.
Highly-complicated chains also contribute to many deals falling through, usually due to one link in the chain pulling out.
Having a cash buyer in that chain breaks the link and makes the process far less complicated.
Cash buyers speed up the process
Not only do cash buyers offer a level of protection against property sales falling through, they can also mean they’re completed very quickly.
Buyers needing a mortgage often have to wait at least four weeks before their application is approved, whereas cash buyers can move right away.
That means, as long as things like legal questions and searches are completed in good time, cash buyers can have the keys to their new property often within a few weeks.
Greater security for the buyer
Having a mortgage can be a huge burden for some buyers.
And the worry that can sometimes come with meeting repayments if your circumstances change can be extremely stressful.
Cash buyers have the security of knowing they own their home outright, so if their circumstances do change, they have options.
Buying an investment property in cash
If you’re looking to buy a property as an investment to rent out, you could be forgiven for thinking being a cash buyer would be a major advantage.
And it is, of course, when you factor in everything we’ve outlined above.
However, while buying a home to live in with cash makes perfect sense, spending the same money on a property to rent out isn’t quite as clear cut.
One of the best ways to maximise rental profit and capital growth as a landlord is to spread your investment over several properties.
So, if you have £500,000 in cash to spend, you might be better splitting that money over four properties and topping up each purchase with a mortgage.
That way, you also benefit from any capital growth on the mortgage lender’s money, as well as your own.
For instance, if a £500,000 property bought in cash grew by 10% in one year, that would mean £50,000 of equity.
But 10% growth on four properties bought with that same £500,000, but split into £125,000 deposits (25%) on each combined with mortgages, would see that combined equity increase to £200,000.
Your money is tied up in property
Even buyers purchasing a property with cash that they intend to live in should weigh up the pros and cons of doing so.
As with investment properties, you should ask yourself if property is the best place for your cash to be tied up.
If prices are on the rise rapidly, the return on your investment will be solid.
But if the market is stagnant, as it is currently due to political uncertainty, your money might do more for you invested in other areas.
With interest rates remaining low, borrowing is still reasonably cheap, so you could be better off having a mortgage on your property and investing some of your cash elsewhere.
Always seek independent financial advice, and consider your own personal circumstances, before making any decision on where to invest your cash.
If you’re thinking of selling or buying, contact your local Whitegates office who are here to help.