When purchasing a property through home finance, buyers may end up spending the equivalent of what the property is worth in interest over the course of the loan term. One of the only ways to avoid this is to purchase the home in cash. The challenge is saving up enough to afford to do so.
According to Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, there are several benefits to purchasing a home in cash. “Beyond saving themselves the cost of interest charges, buyers will also stand a better chance of having their offer be accepted by the seller – especially when the seller is in a hurry to sell. These sellers might even be willing to accept a lower cash offer over a higher offer pending home finance approval because of the greater simplicity of the deal which also allows for a greater likelihood that the deal will not fall through,” says Goslett.
However, finding the necessary funds to afford a cash offer is no easy feat. “Unless the buyer has inherited a large sum of money or has recently sold a business for a large sum of money, finding enough readily available cash to purchase a home without any lines of credit can be a complicated task. My advice is to start small and work your way up,” says Goslett.
Elaborating on this, he explains that property appreciates in value, which allows the homeowners to climb the property ladder if they have bought and sold wisely. “If the goal is to one day purchase a home in cash, I would suggest starting with an affordable home in a desirable suburb that will grow in value and can be paid off in full within five to ten years. Once paid in full, the homeowner can sell the home and use the whole amount plus the profit generated from the sale to purchase a new home in cash.”
To achieve this, Goslett highlights that homeowners will need to practice the self-discipline to pay extra into their home loan each month so that they can pay off the loan sooner than the original loan term. “As a bonus, paying extra into the home loan each month will also minimize the amount of interest payable.”
The alternative to this is to save aggressively to afford to purchase a home in cash from the very outset. “My advice to those who attempt this method is to find the most affordable place to rent while saving up to purchase. Buyers might also consider purchasing a smaller, more affordable home first, as it will be easier to save up enough to afford this purchase in cash. The buyers can then sell the home for a profit in five to ten years and can then afford to purchase a bigger, more expensive property.”
For those who are looking to purchase, Goslett recommends getting in touch with a local property expert who can guide them towards making the right investment. “When viewing potential home, ask about house price appreciation in the area to find out what returns you can expect to make on the property. This will be particularly important to help you determine timelines if you are hoping to climb the property ladder by later selling the home. Local real estate professionals will be helpful in this regard and can provide you with some sound advice on the topic if you ask them for it.”
“Buying a home in cash is a great way to save on interest charges and to bolster one’s financial standing. Even if buyers cannot afford to purchase a home in cash from the outset, paying off the home loan as soon as possible will help to create greater financial freedom,” Goslett concludes.
