When you weigh cash vs mortgage financing, there are some crucial elements you need to understand before you make a decision on whether you are opting to make an outright payment for the house or if you would rather settle for a mortgage plan.
To put you in a position to make a more informed choice, we will take a look at the dynamics of owning a property by either paying the cash value of the house or spreading your payment over a period of time via a mortgage loan. This explains the concept of cash vs mortgage financing. We’ll take them one after the other. Let us start by looking at what it means to buy a house with cash as well as the pros and cons of this option.
Buying a House With Cash
When you buy a house with cash, you pay the seller cash to cover the cost of the house. The cash you pay covers the full payment of the house. For this payment option, you don’t need to raise funds through a bank or worry yourself with the headache of repaying a housing loan.
Here is a scenario, if the selling price of a detached house in Lekki is pegged at N186 million, to buy this house with cash, you will have to pay the seller a minimum of N186 million for the property. The final figure will depend on whether this cost covers property documentation.
Pros of Buying a House With Cash
Let us highlight some of the advantages of paying cash vs mortgage financing when buying a house.
- Seriousness: Property sellers will take you more seriously when they know you are not applying for a mortgage to pay for their house
- Flexibility: It is flexible closing a home deal when cash is available than one that requires funding
- Power of Negotiation: You have the advantage of negotiating a better deal to buy a property when you are paying cash for it. It makes it more attractive to the seller who would be more likely to negotiate
- Tours: When you offer to pay cash for a house, you enjoy the liberty of taking a tour of the property
- Lodging Complaints: As a potential buyer willing to pay cash to buy a property, you can lodge complaints on things you want to be repaired or upgraded before you make payment
- Cuts Out Repayment Plans: Paying for your home phases out the option of trying to raise funds through the bank, which comes with a repayment plan and interest
- Easy to Buy and Sell: Paying cash takes away a great source of uncertainty. When you decide to sell, you won’t find yourself at the mercy of a mortgage broker
- A Sense of Security: If you lose your job or find yourself in a financial mess, you don’t have to panic if you buy your property with cash. If you own your house completely, you don’t have to worry about foreclosure (the act of taking possession of a mortgaged property when the mortgagor fails to keep up their mortgage payments)
- Offers Home Equity: A house that you have fully paid for provides you with a reliable source of property equity if you ever run into financial troubles
Cons of Paying Cash to Buy a House
Buying a house by making cash payment also has its flaws as you will see in the lines that follow.
- Trapped Cash: Let us be honest here. When you pay that much money to buy a house will cost you a lot of liquid assets. You should only buy a house with cash if you still have a large pool of cash for emergencies. Once you buy a house with a full payment for it, the only way you can access that money again is to sell the house
- Lack of Leverage: You will miss out on an opportunity to make money if you buy a house with cash as opposed to having your mortgage payment locked in. With a mortgage, you can have a favourable interest rate and during inflationary periods, you will find yourself making money due to the effects of inflation.
Buying a House With a Mortgage Plan
When you acquire a house with a mortgage, it simply means you legally take up an agreement that allows you to borrow money from a bank or similar organization in order to buy a house or the amount of money itself.
Unlike home buyers who have cash on standby to buy a property, a lot of prospective homebuyers end up missing opportunities to own a property dream because they feel they can easily raise funds without the help of the bank. Others are left sorting their mortgage too late. This is why processing your mortgage puts you in a stronger position with the seller of the house. It gives you the confidence to share your opinion on the property and it reduces stress.
Let us take a look at some of the advantages and disadvantages of taking up a mortgage plan.
Pros of Mortgage Loans
A mortgage plan comes with a number of advantages that you should take a thorough look at before you make that decision. Below are some of the great things about a mortgage.
- It Does Not Tie Up Your Cash: As opposed to buying a house with cash, a mortgage plan gives you the flexibility to spread your payment over a period of time.
- Leaves Room For Other Projects: Here’s a scenario – You have N180 million in cash and you want to buy a house (worth N120 million), 4 trucks (worth N5 million each) and invest N70 million into a particular project. If you decide to buy the house by paying cash for it, other projects will suffer but with a mortgage plan, you can see a bigger picture.
- Reduced Tax Implications: Mortgage interest payments usually have a reduced tax obligation that may be a financially wise way to finance the house
- More People Can Own Their Own Homes: In a country where 80% of the urban population live in rented apartments, more Nigerians will be able to own their own homes via a mortgage plan than making an outright payment of cash for the property.
- Cost-Effectiveness: The interest loan on mortgages are lower than other types of loans
- East to Repay: Mortgage is repaid on a monthly basis and is done little by little depending on the interest rate. What you pay back every month could end up being lower than what you would have had to pay as your monthly rent
Cons of Mortgage Plans
There are downsides to mortgage plans especially when viewed from a perspective of cash vs mortgage financing and you should take a moment to look through them before you take the plunge.
- Debt: A mortgage leaves you in a situation where you own a home but you will pay back a lot of money over a long period of time. You can have your mortgage spread over an many as 30-40 years
- Paying Back More Than You Borrowed: The interest on a mortgage plan will have you paying much more than you actually borrowed
- Secured Loan: A secured loan is a loan in which the borrower pledges some asset (like a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. This is precisely what a mortgage is and failure to repay the loan leads to the loss/forfeiture of your house
- Extra Fees: In addition to the interest that you pay on the mortgage loan, you will also be held responsible for valuation fees, remortgaging fees and conveyancing costs
- Repossession Happens: If you default on the payment of your mortgage over a period of time, your house can be repossessed. This a risk that comes with mortgage plans
Final Thoughts on Cash Vs Mortgage Financing
Regardless of the differences in cash vs mortgage financing, the important thing is finding what works for you without necessarily sacrificing other necessary aspects of your life. You should also put some thoughts into which option offers you more benefits.
When faced with cash vs mortgage financing, consider going for an option that will give you a greater return on investment regardless of whether it’s a rental or commercial property.
