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- Buying property with cash shortens the buying process, allows for below-market offers to be more readily accepted, and increases cash flow for buy-to-let investors.
- Cash buyers often receive discounts, with an average cash buyer paying 9% less than mortgage buyers.
- Mortgages require less initial capital, making property acquisition more accessible. This allows buyers to potentially benefit from rising property prices sooner.
Whether you should buy a property with cash or utilise a mortgage instead is a hotly debated topic in the property investing world; on the one side, there are cash fanatics who wouldn’t dare touch a mortgage and on the other, investors who take on large amounts of debt to purchase their rentals. I think I’m somewhere in the middle, so rest assured that this article will be objective, presenting the advantages and disadvantages of both methods.
We’ll first look at buying with cash – its advantages, its disadvantages and lastly, we’ll summarise the pros and cons for easy comparison. Then we’ll flip the script and look at buying with a mortgage.
Buying Property With Cash
The first property buying option that we’re going to look at today is buying the property outright with cash – meaning that whatever your offer, you’re going to need that sum in cash. Pretty simple stuff. Now let’s look at the advantages of bringing all the money to the table.
The Advantages Of Buying A House With Cash UK
1) It Shortens The House Buying Process
One of the largest advantages of buying a property with cash is that it removes the need for a lender and thus shortens the entire house buying process by quite a bit; whereas it may take 6 to 12 weeks if you were to buy with a mortgage, buying with cash reduces this down to 4 to 8 weeks. In a market where time is of the essence, being able to save a few weeks is a massive advantage and something that you can point to when negotiating a deal with the vendor, especially if they need to sell the house as fast as possible.
2) Below The Market Offers Are More Likely To Be Accepted
Since you’re removing the chance of not being able to fund your purchase, as well as being able to move faster, you offer the vendor/seller more certainty in regards to you being able to complete the deal. This places you in a far stronger position to negotiate your offer than the average mortgage buyer, allowing you to make an offer well below the market price and have it accepted. It’s quite common for cash house buyers to receive a sizeable discount, ranging from 5% all the way up to 20% if the buyer is incredibly motivated. According to the Financial Reporter, the average cash buyer paid 9% less than mortgage buyers.
3) For Buy-To-let Investors, Purchasing With Cash Will Increase Your Cash Flow
Monthly mortgage payments are the biggest expense of any buy-to-let investor, by buying with cash you’re removing that expense and pocketing more profit every month.
For example, if you purchase a £100k buy-to-let property with a 75% LTV interest-only mortgage that has a rate of 5%, your monthly mortgage payment would be £312. Whereas, your monthly rental income would likely be around £650-£700 meaning that almost half of that would be gone after your mortgage payment. If you were to buy that property outright, you would make an additional £3,744 per year compared to mortgage buyers.
Note – before you get too excited and decide to only purchase with cash, there’s more to consider here but we’ll touch on that further down in the ‘purchase with a mortgage’ section of this article.
4) You Have More to Choose From
If you’ve ever spent a prolonged amount of time on Rightmove, Zoopla or other such sites, you’ve likely noticed that there are quite a few properties on there that are advertised as ‘Cash Buyers Only’ – an opportunity that is only present for people with the cash on hand. An added bonus here is that you’re facing less competition as the majority of purchasers will be looking to buy with a mortgage.
5) Less Purchasing Fees
By not using a mortgage, you won’t have to pay those pesky mortgage product fees – this could represent a saving of up to £2000. A saving which you could use to further upgrade your newly purchased property.
Pros and Cons of Buying Property With Cash
At this point, you must be thinking that cash is definitely the way to go, screw mortgages right? Not so fast, while buying a property with cash has plenty of advantages, there are also plenty of disadvantages. Conveniently enough, these pitfalls just so happen to go hand in hand with the advantages of using a mortgage – thus, we’ll quickly summarise them in the rather handy table below before diving into more detail in the next section of this article.
| Pros | Cons |
|---|---|
| You can purchase a house much faster if you buy with cash – it’s possible to get it done within a month. | Quite obviously, saving the money necessary to purchase a property with cash is going to be quite difficult and will take a while. |
| You can get the property at a discount due to offering more certainty to the seller. | By having to save for longer, you may find that by the time you have enough money saved up, the property would have increased in value and you could no longer afford it. |
| No monthly mortgage costs mean that investors will have a higher cash-flow. Residential owners benefit from having less monthly expenditure. | There will often be a reason why properties are listed as ‘cash buyers only’ – whether something is happening in the seller’s life and they need to sell it ASAP or there’s something wrong with the property itself – maybe it’s not habitable or the leasehold is below 100 years. Cash only properties need to be analysed thoroughly to ensure you’re not getting yourself into more than you can handle. |
| A wider market to choose from – there are plenty of properties only available to cash buyers. | By buying with cash, you’re tying up a large amount of capital in a single asset class. If the property market stumbles across a rough patch, you may find yourself in negative equity and thus selling it wouldn’t be advised unless you wish to take a hefty loss on the chin. |
| There’s less fees involved when purchasing the property with cash – for example, no mortgage arrangement fees (which can be as high as £2,000!) | Whilst it may take less time to purchase with cash, it’s important to note that other complications may arise which prolong the process – it’s not guaranteed that you will close on the property fast. |
The Key to Successful Investments
Buying Property With a Mortgage
Now let’s deep dive into buying properties with mortgages – this applies to both residential mortgages and buy-to-let mortgages.
Advantages of Buying a House With a Mortgage
1) Less Money Is Required
An obvious point but an important one to make when addressing the stand out advantages of using a mortgage to purchase a property – you require a lot less money than if you were to purchase using cash. For residential mortgages, the minimum deposit is 5% (although 10% would be recommended) and 25% for buy-to-let mortgages. This makes purchasing a property more accessible and an actual reality for the majority of people – after all, not many people can whip out 6 figures in cash to buy a house.
Since it’s more accessible and less money is required, it’s more likely that you will be able to purchase your first home or rental property within the near future, not 5 or more years from now when properties have increased by a boat load, making your dream house a fantasy. Going hand-in-hand with this, you’ll be able to take advantage of rising property prices sooner (of course this isn’t guaranteed but property prices in the UK have doubled every 10-15 years since 1085 which paints a promising picture going into the feature).
2) You Can Split Your Cash Into Several Purchases
If you are one of the few who have a good chunk of money sitting in the bank, thus making purchasing with cash an option for you, you may choose to use mortgages in order to split your cash across several buy-to-let properties instead of just the one. Doing so will increase your cash flow as well as greatly increase your portfolio value. Let’s run the numbers very quickly:
Let’s say that you have £100,000 available to invest in property – you could use that to purchase one £90,000 house with cash or purchase three £90,000 houses with mortgages and still have a few thousand left over. Let’s see how this would look from a cash flow, portfolio value and potential gain from a value appreciation perspective (we’re assuming the properties would rent for £650 a month which is more or less correct for a £90k property).
| One Property Purchased With Cash | 3 Properties Purchased With Buy-To-Let Mortgages | |
|---|---|---|
| Cash Necessary | £100,000 | £100,000 |
| Monthly Profit (Assuming you self manage) | £625 | £1,029 |
| Portfolio Value | £90,000 | £270,000 |
| Cash gain if 3% rise in property value | £2,700 | £8,100 |
4) Mortgage = Leverage
Linked to the above point, using a mortgage allows you to leverage your property investment. Instead of having a single property worth £90,000, you can purchase three properties which would make your portfolio worth £270,00. This means that you’ll make a lot more money (at least on paper) if the property value were to rise than you would if you owned just one.
For property investors looking to build their portfolios quickly, mortgages are 100% the way to go.
Pros and Cons of Buying With a Mortgage
| Pros | Cons |
|---|---|
| Less money is required to purchase the property making it more accessible. | You’re taking on debt and should be aware of the risks involved in purchasing with a mortgage. |
| You can split your cash across several properties instead of just the one if you’re buying rentals. | You will end up paying a lot more than the property is worth in the long run due to interest on the mortgage. |
| By using a buy-to-let mortgage, you can leverage your investment and earn a far better return on your money than if using cash. | Mortgage rates can change so it’s entirely possible that your monthly payments may increase – although they can decrease as well. |
Should You Buy With Cash or a Mortgage?
So at this point, you may be thinking, well is it better to get a mortgage or pay cash? As with most things in property, it all depends on what your goals are, what you prioritise and, if you’re investing, which property investing strategy are you utilising.
It’s hard to give you a definite answer but in general, mortgages are probably the better option due to them making property more accessible to people – both those looking for a home and investors looking to buy a rental property.
A common strategy for reducing the disadvantages of a mortgage is to increase your deposit each time you need to find a new mortgage (contrary to popular belief, mortgage products do not last 25 or 30 years, you need to find a new one every 2 to 5 years depending on your term until the entire mortgage is paid off) or max out your early repayment allowance each year to pay off the loan quicker. This reduces the overall amount that you have to pay in the future and gets you closer to owning your house outright much faster.
If you’re on team mortgage now, may I suggest using our buy-to-let brokerage tool. It’s free to use, they offer fast online applications on all the mortgages available and, best of all, they offer some of the best rates on the market.
Victor Sterling
Hi, my name’s Victor - I’ve been investing in property for three years now, with my preferred strategies being buy-to-let, BRR and house flips. My goal with Amateur Landlord is simple - to provide beginners with easy-to-follow resources that simply weren’t around when I started, and to offer these for free and without ads.