Buying Properties with Cash or mortgage: which one is more beneficial?

Buying an investment property with cash or mortgage comes down to one thing: your current financial situation. If you’re not in a strong financial position or are going through a tough time then it’s recommended that you go for a mortgage.

Mortgage

    Investing in property is highly leveraged. This means that it allows you to magnify your potential return with minimal amount of funds! Let’s say you go interest only to borrow 80% of the property price and leave all your funds in an offset account. Effectively, you don’t need to pay LMI and you won’t owe anything. On top of that, you’ll still be able to draw out money when you want to. Drawing out money for something else, however, means that you’ll have a tax deductible loan on the property.

Benefits of a mortgage

Buying real estate is no doubt one of the biggest purchases you’ll ever make. For many people, it may be impossible to buy a property without getting a mortgage.

Some benefits of taking out a mortgage to buy property include:

• Affordable home ownership: An investment home loan allows you to spread the repayments on your property purchase over a significant period of time, usually 25-30 years. Your monthly repayments are more manageable and, hence, affordable.

• Cost-effective way to borrow: Mortgages generally have a lower interest rate than other forms of borrowing. You can even be eligible for purchase cash backs, a range of discounts and grants as long as you meet the lender’s criteria.

• Funds available at any time: By leaving your funds in an offset account, you have funds set aside for when you need it most!

Cash

Buying a property with cash may make sense to people with high incomes. Despite this, understanding the downside of a cash purchase may help you avoid financial setbacks in the future.

Advantages of buying property with cash

When you’re in a position where you can buy the property with cash and still be financially stable, go for it!

By paying all cash to buy a home:

• You’ll be debt and rent free: A mortgage is the biggest debt that you can have. Loan repayments can also make up a huge amount of your monthly expenses. You could, instead, divert that money to saving and investing for a much higher return.

• You’ll have equity available: If you’re ever in a financially tough situation, you can tap in the equity in your home with a home equity loan or line of credit.

• You’ll have a sense of security and ownership: Since you’ll already own the home completely, you’re ensured that you have a place to stay even if you lose your job or hit a financial emergency.

Disadvantages of buying outright

In general, buying a property with cash means that:

• You’ll lose the liquidity on your property: Buying a property outright means losing the liquidity on assets in your property. This means you won’t be able to tap in your assets for money if you ever need to. You can, of course, take out a home equity loan against your property but it has its drawbacks, including fees and borrowing limits.

• You’ll lose your financial leverage: If you’ve borrowed money to buy a property, the potential return on the property will be much higher, provided that the property increases in value. For instance, you’ve put down 20% of the property value for a property worth $400,000 that has since increased by $100,000. You’ll have gained $100,000 on your $80,000 down payment. This means your return will be around 125%, which is 100% more than if you had paid cash for the property.

• You’ll be tying all your cash in just one asset class: If you’re planning to spend most of your savings to buy a property then you may not be able to invest in other assets. By getting a mortgage, you’ll not only be investing in property but will have enough to invest in shares or any other form of investment.

Compass Original

Editor：Chea