A questions that everyone who can afford purchasing a
house for cash asks. We will discuss in this article the possibilities, so that
we can help you decide what suites your situation better.
Questions to ask yourself:
1. Why are you buying the property- Buy to let, Buy to
occupy, or Buy to sell out in a relatively short period of time. If you are an
investor buying to let, it is healthy to allow your money go all the way being
invested in income earning assets financing 50 to 60% of the property value
allows you to spread your money while maintaining a safe percentage of equity
in your asset. Buying to occupy works the same way if you treat the property as
a business and lease the property out asif you are a tenant of yourself. While
if buying to sell in a relatively short period, cash or other forms of finance
may represent a cheaper option if available.
2. How old are you. (usually costs surrounding arranging
a mortgage may pile us, and the longer the mortgage is for the more feasible it
becomes to arrange for one. Most banks in some jurisdictions finance you up to
the age of 65. Although mortgaging may help you purchase a property even if the
mortgage is for 5 to 10 years you get the best of the mortgage the longer the
period is)
3. What do you do in life. Are you a self-employed trader, a self-employed
service provider, or an employee. If you are a self-employed trader it is
advantageous to have your cash in your business as it earns multiples of what a
mortgage would cost. While if you are a self-employed service provider or an
employee it may be less advantageous to have the cash, so you will need to
consider your plans post your purchase. Will you want to invest in other
properties, do you have your finances in line with your future financial needs,
do you have access money. All those considerations should be looked through for
you to do an informed decision.
Things we should agree on:
1. Cash is so valuable. (if utilized in investments)
2. Cash loses buying power with time. Cash loses on
average 3 to 8% to inflation on annual basis.
3. Every property is an investment even a property you
live in. It mostly gains value with time, possess characteristics to be a hedge against inflation, saves you rent if
you are living in it while earns you rent if you lease it out.
4. Leveraging is one of the oldest used tools in its
basic form. The word derives from Lever, the tool used by humans since ancient
times to move big objects that they would not otherwise be able to move
without.
Why would we use a mortgage if we can pay for a property
in cash, considering all the above.
1. Purchasing an asset of mostly appreciating value at
today’s price and paying for it in the future using a currency that devalues is
definitely a great idea.
2. Limiting your cash outlay may allow you additional
investment power in the same asset class or diversifying into others.
3. If you choose the right property and the right
mortgage the property may pay for itself.
What not to do if you have access to mortgage.
- Don’t be persuaded with a high LTV, over leveraging is
can put you on the wrong track in wealth creation.
- Make sure you can afford the payment of the mortgage
comfortably. Purchasing a bigger home is tempting however you will be paying
for it.
- Keep a 3 to 6 months expenses in a security fund.
Enjoy investment, make the right choices.
