If you’ve had a cash windfall and are considering buying a house outright, here’s what you need to know about buying a house with cash in South Africa.
Article summary
- Purchasing a home with cash makes you attractive to sellers who want to close the deal quickly, putting you in a strong negotiating position.
- However, buying a home with cash could stretch you financially, making it hard to deal with all the additional expenses of home purchase.
- Furthermore, bond interest payments are tax deductible, and a home loan allows more flexibility in how you assign your resources.
Picture this: You find the perfect house, and buy it outright.
While paying cash for a home is still a far-fetched dream for many people, for those who can do it, paying in cash does offer some advantages.
Buying a house with cash: How does it work?
If you’ve had a cash windfall and are considering buying outright, here’s your guide to the process of buying a house with cash.
Get the money together
Whether you already have the money in a savings account, or sitting in various stocks that you’ll need to withdraw from, ensure you have a plan for acquiring the required funds. You may wish to seek the help of a financial advisor in determining what’s required and what it will mean for you in the long-term.
Obtain proof of funds
The best way to do this is to get a letter from a lender or bank that shows you have the necessary funds available. You can also use a bank statement, although this may contain sensitive information, hence why it’s better to acquire the letter.
Make an offer
Making a cash offer will make you more attractive to sellers, who view it as an opportunity to close the deal much quicker. This puts you in a strong negotiating position.
However, you should still include some conditions in the contract, such as the need for an inspection and appraisal of the property.
No credit check
Making a cash purchase will preclude the need for a credit check, a significant weight off your shoulders as there will be no chance of your home purchase being denied due to your financial history.
Bear in mind additional expenses
The cost of home inspection and transfer of property process will require additional payments from the home buyer, so be sure you have money set aside for the various processes that follow the offer to purchase, such as transfer costs and duties.
Close the deal
Whereas closing the deal can take around 10 to 15 days if the home is purchased using a home loan, a cash purchase can usually be closed in a few days. Thereafter, transfer of the property for a cash deal can be as quick as 6 weeks, whereas transfer on a property with a bond is usually about 3 months.
Why taking out a bond makes financial sense
“Even if a buyer has the ability to pay cash for a home, it may not make sense to tie up a lot of one’s money in property,” says Yvonne Viljoen, Property Finance Specialist at ooba Home Loans, South Africa’s largest home loan comparison service.
If you need cash for some other purchase or emergency, you may not have the money available to you if it is tied up in your property.
Selling a home bought with cash could also pose a problem if the owner stretched a lot financially to buy it, Viljoen says. “If cash buyers decide it’s time to sell and they want to purchase a new home, they need to make sure they have sufficient extra cash reserves to put down as a deposit on their new home.”
Other considerations
Paying cash also has tax implications. “In most cases, bond interest payments are tax-deductible, if you are renting out the property,” says Viljoen. “And while you shouldn’t opt for a bond just to get a deduction, a reduced tax obligation never hurts.”
Of course, with a bond, you end up paying more overall, since it comes with interest payments that do add up over time. But, depending on the state of the stock market, Viljoen also notes that saving on home-loan interest by paying cash might not be financially prudent. “You could be saving less than that money might have earned had you taken out a bond and invested the cash you didn’t spend on your house in stocks or shares.”
Not having a bond could also make it easier for creditors to seize your home should you find yourself seriously in debt in the future. “The bank may offer you a ‘payment holiday’ on your bond instalments, allowing you to get back on your feet. They may even renegotiate the terms of your loan by either lowering your interest rate or increasing the length of your loan contract,” Viljoen explains.
Cash or bond purchase?
So a bond purchase has many advantages, such as tax subsidies, and the ability to draw on home equity. Ultimately, you should go for the option that grants the biggest bang for your buck.
Whatever the case, be sure to seek the advice of a home loan comparison service like ooba Home Loans when looking into funding options. If you opt to go for a home loan instead, ooba Home Loans can help you acquire the best deal by applying to multiple banks on your behalf.
They also make the home buying process easier by offering a range of tools. Start with their Bond Calculator, then use the ooba Home Loans Bond Indicator to determine what you can afford. Finally, when you’re ready, you can apply for a home loan.
