Getting a mortgage or paying with cash, which one should be considered? Not everyone has enough cash to pay for property or investments at once but at the same time not everyone wants to be in a debt. Deciding what method to choose is totally a personal preference depending on the person’s budget and ability to pay. However here are some few factors to consider on whether to choose paying through mortgage or by cash.
Starting with mortgages, they are an affordable way to pay through as you can pay in instalments and thus not having to worry about arranging for all the money at once. For the middle-class people it makes sense to pay through mortgages as they will have to pay a small amount monthly rather than all at once. There is a certain ease in payments. And it is the traditional approach to buying a home.
Moreover, there is a tax relief that can be a benefit when you have a mortgage. In Kenya, there is a mortgage relief for tax that is “any person who borrows money from a registered financial institution to purchase a home or improve a home as long as he/she occupies the home will be entitled to an interest deduction of up to a maximum of Kshs.300, 000 /- per annum of interest paid to the approved financial institution.” This is a benefit that comes along with taking mortgages.
However, with mortgages you end up paying more money because of the interest rates. The rates in Kenya vary from 12% to 15%. These are standard but could be high for the common man depending on the mortgage they have secured. There are some additional fees also tied up with mortgages and need to be paid so technically you end up paying way more than the actual price when taking a mortgage. Also it is a prolonged debt and most people don’t like to be in a debt.
Moving on to cash, cash buyers are more attractive to home sellers. It is obvious that a seller would prefer a cash buyer who will pay at once or most probably in two payments over those who take a mortgage. There are a few advantages of buying with cash like no interest rates and a probability for cash discounts. You don’t have to pay additional interest rates and also there is a negotiating power to lower prices because you are paying in cash.
In addition to that, there is a sense of security that the property is actually yours and you don’t need to put it up as security against any debt. It also means that you can move in or rent out sooner because of the lack of mortgage and so you don’t have to worry about occupancy issues or mortgage rates.
However there are drawbacks of paying with cash. Cash is the most liquid asset and thus it is better to invest it in many places rather than all in one investment. There is a loss of liquidity if you invest most of your cash in buying a property. Moreover if you need cash to do some repairs or pay for other stuff that you cannot get a mortgage for it will be difficult and so it is better to save the cash. So basically, paying with cash would lead to higher risk and lower liquidity.
Moreover, if you don’t have money elsewhere it is advisable not to invest it all in buying a property. As the saying goes, ‘Don’t put all your eggs in one basket’, the same applies for your cash. It is better and smarter to invest it in many places so that the risk is low and the returns are higher.
These are a few advantages and drawbacks of cash and mortgages. It is advisable to use either as long as it works for you and your budget. You can even get the best of both worlds and pay a bit with cash and also use a mortgage.