Mortgage freedom is considered by many to be the ultimate financial goal. Having no mortgage can give you a lot more monthly disposable income and a better sense of security, but is it better to buy a house with cash if you can afford it?
The benefits of buying a house in cash
Cash home purchases have many benefits, including being simpler and more affordable than mortgages. There is no denying that mortgage interest is a big expense over time, no matter how low interest rates are right now. It can certainly be appealing to avoid interest charges and other costs, such as mortgage arrangement and valuation fees.
Additionally, you may be able to negotiate a better price if you buy cash rather than waiting for a mortgage approval.
You can use cash to purchase when you might not otherwise be able to, such as if you lack a regular income, do not meet affordability criteria, or recently had credit problems. Also, the property may have problems that prevent it from being mortgaged, such as being uninhabitable. Buying cash gives you more flexibility.
So is it always better to buy a house in cash?
No, that’s not the case. Owning your home outright has its advantages, not the least of which is emotional security, but it may not always be the best option, especially if it leaves you with little cash.
When you own a home, you should always have some cash saved up to cover unexpected bills or repairs. By purchasing your house in cash, you might leave yourself susceptible to future emergencies.
Could the cash be used more smartly?
The advantage of a mortgage over buying a house outright in cash is that your savings might actually work harder elsewhere. Mortgage interest rates are low compared to the return you could see from investing the cash instead into a pension or stocks and shares, and the money you can potentially earn could well exceed the interest payments you’ll be making, leaving you better off overall.
Another smarter way to use your money is to split it over two or more properties – using one as a buy-to-let.
For example, rather than spending £300,000 on one house, could you put £150,000 down on two and borrow the rest, earn rental income on one and benefit from capital growth on both? By putting down 25% on four properties, you will see your initial cash investment go much further than if you invested it in one mortgage-free property.
Cash isn’t always the best way to buy a house, so get some expert advice and start making that cash work for you.