Jackie Smith | Head | Product | Buyer’s Trust | ooba Group | mail me |
For those who have just won the Lotto – or in a more likely scenario – are exceptionally good at saving – choosing to buy a home in cash can have its advantages. However, this option also means forgoing tax benefits, and tying up a substantial amount of hard cash in a fixed asset for a long period of time.
There are homebuyers out there – particularly investors – purchasing homes with cash. One of the key advantages is that it speeds up the homebuying process quite significantly.
The process of buying a home in cash
Closing the deal after making an offer to purchase with home loan financing usually takes about two weeks, but when making a cash offer this can be reduced to just a few days.
The process of buying a home in cash closely resembles that of purchasing a home via financing – apart from forgoing a credit check. Instead, the buyer is required to show proof of funds. This can be done by obtaining a verified letter from your bank that shows you have the necessary funds at your disposal, but this option comes at a significant cost.
Alternatively, there are other more cost-effective ways of proving that you are ‘good for the cash’ such as by opting to use the Buyers Trust platform which issues you a free bank guarantee. A bank guarantee serves as an official promise to the seller that the buyer’s financial obligations will be fulfilled.
In addition to the faster purchasing process, other advantages include:
You won’t have to pay interest on a home loan
The interest accrued over the course of a 20 or 30-year bond is substantial when totalled up, but buying a home in cash exempts you from both this and the stress of fluctuating interest rates.
You can however be paid interest during the property transfer process by entrusting your deposit to a maximum interest-bearing account like the one offered by the Buyers Trust platform.
More bargaining power
Offering to buy a home in cash automatically makes yours the most attractive offer on the table, because of the lowered risk of the deal falling through, thereby appealing to motivated sellers. Because it simplifies the sale process, sellers who want to sell their property quickly may be willing to accept a cash offer lower than asking, allowing you to negotiate.
No credit checks
For those with a spotty financial history, the prospect of undergoing a credit check as is required when applying for a home loan may not be appealing. However, if you have the funds available outright, there is no chance of your home purchase being rejected due to a low credit score.
The drawbacks of a cash purchase
No liquidity
If all your money is tied up in a property, you will be left high and dry in the case of an emergency or if you need to fund another purchase. While you may be saving on monthly bond repayments in a high interest rate environment, property doesn’t offer the same return on investment as stocks or commodities in the short-term.
Tax considerations
Should you be purchasing the property for the purpose of renting it out, buying in cash won’t qualify you for the same tax-deductible benefits that come with bond interest repayments.
Property is a risk
Property is an investment and as with any investment, there is risk involved. The property market is constantly in flux, and should you need to sell in a low property price environment or a buyer’s market (like the one we are currently experiencing) there’s a chance you could make a loss.
Not building credit history
For those looking to strengthen their credit score and history, taking out a home loan and making monthly repayments in a timely fashion is an indicator to lenders that you are a low credit risk.
Having a low credit score will put you at a disadvantage should you need a loan in the future to make a large purchase, such as another property.
How to protect your money during the buying process
Those who purchase a home using home loan financing are not responsible for the safe transfer of funds to the seller, as this is the duty of their lender, but those buying a home in cash do not have the same luxury.
If you’re going to be electronically transferring huge sums of money to secure the purchase of your home, the need for the highest level of cybersecurity is paramount. Should those funds be intercepted by a criminal, you will be left without both your money and your dream home.
I recommend following these cybersecurity tips to avoid this worst-case outcome:
- Give your deposit the highest level of protection during the transfer process. The Buyers Trust platform employs extensive cyber security measures and assists with issuing a free bank guarantee to protect the buyer from having to transfer the funds to third party, such as a conveyancer.
- Only transact on secure networks. Avoid using public computers or unsecured Wi-Fi networks for sensitive banking tasks.
- Use strong passwords. Create strong, unique passwords for your online banking accounts. Avoid using easily guessable information like birthdays or names.
- Enable Two-Factor Authentication. This adds an extra layer of security by requiring you to provide a second form of authentication, such as a code sent to your phone, in addition to your password.
- Don’t exchange sensitive information over email. Phishing (fraudsters intercepting emails between a buyer and seller to pose as a legitimate party and divert funds to their own account) is on the rise in South Africa. These emails often closely resemble legitimate communications so avoid sharing sensitive information like account numbers and passwords through email.
