Cash or mortgage: which one is more beneficial?
Buying an investment property with cash obviously sounds more logical than a mortgage, considering the complications that can arise when you’re in debt.
However, it may be difficult to sustain a living if you don’t have funds put aside beforehand.
Taking out a mortgage lets you enjoy the luxury of owning your own property and still having money to draw out if you need it!
Should I buy a property with cash or mortgage?
Buying an investment property with cash or mortgage comes down to one thing: your current financial situation.
If you’re not in a strong financial position or are going through a tough time then it’s recommended that you go for a mortgage.
Why should I consider getting a mortgage?
Investing in property is highly leveraged. This means that it allows you to magnify your potential return with minimal amount of funds!
Let’s say you go interest only to borrow 80% of the property price and leave all your funds in an offset account. Effectively, you don’t need to pay LMI and you won’t owe anything. On top of that, you’ll still be able to draw out money when you want to.
Drawing out money for something else, however, means that you’ll have a tax deductible loan on the property.
Speak with your accountant for specific tax advice for your situation.
Call us on 1300 889 743 or fill in our free online assessment form to speak with one of our brokers about your situation. They can help you decide whether you should buy with cash or mortgage.
Benefits of a mortgage
Buying real estate is no doubt one of the biggest purchases you’ll ever make. For many people, it may be impossible to buy a property without getting a mortgage.
Some benefits of taking out a mortgage to buy property include:
- Affordable home ownership: An investment home loan allows you to spread the repayments on your property purchase over a significant period of time, usually 25-30 years. Your monthly repayments are more manageable and, hence, affordable.
- Cost-effective way to borrow: Mortgages generally have a lower interest rate than other forms of borrowing. You can even be eligible for purchase cash backs, a range of discounts and grants as long as you meet the lender’s criteria.
- Funds available at any time: By leaving your funds in an offset account, you have funds set aside for when you need it most!
What if I buy a property with cash?
Buying a property with cash may make sense to people with high incomes.
Despite this, understanding the downside of a cash purchase may help you avoid financial setbacks in the future.
Advantages of buying property with cash
When you’re in a position where you can buy the property with cash and still be financially stable, go for it!
By paying all cash to buy a home:
- You’ll be debt and rent free: A mortgage is the biggest debt that you can have. Loan repayments can also make up a huge amount of your monthly expenses. You could, instead, divert that money to saving and investing for a much higher return.
- You’ll have equity available: If you’re ever in a financially tough situation, you can tap in the equity in your home with a home equity loan or line of credit.
- You’ll have a sense of security and ownership: Since you’ll already own the home completely, you’re ensured that you have a place to stay even if you lose your job or hit a financial emergency.
Disadvantages of buying outright
Although paying cash to buy a property sounds like the more sensible decision, there are certain advantages that you’ll miss out if you don’t take out a mortgage. This is the reason why most borrowers don’t know whether to use cash or mortgage to buy their property.
In general, buying a property with cash means that:
- You’ll lose the liquidity on your property: Buying a property outright means losing the liquidity on assets in your property. This means you won’t be able to tap in your assets for money if you ever need to. You can, of course, take out a home equity loan against your property but it has its drawbacks, including fees and borrowing limits.
- You’ll lose your financial leverage: If you’ve borrowed money to buy a property, the potential return on the property will be much higher, provided that the property increases in value. For instance, you’ve put down 20% of the property value for a property worth $400,000 that has since increased by $100,000. You’ll have gained $100,000 on your $80,000 down payment. This means your return will be around 125%, which is 100% more than if you had paid cash for the property.
- You’ll be tying all your cash in just one asset class: If you’re planning to spend most of your savings to buy a property then you may not be able to invest in other assets. By getting a mortgage, you’ll not only be investing in property but will have enough to invest in shares or any other form of investment.
Disclaimer: The example mentioned above has been oversimplified and ignores factors such as loan repayments and tax deductions. Please consider it as general advice only. It is recommended that you speak with your accountant for professional financial advice on whether you should buy with cash or mortgage.
How does an investment loan work?
Recent changes by the Australian Taxation Office (ATO) has seen many banks and lenders restrict their investment loan books.
Despite this, there are lenders that can approve your mortgage application as long as you meet their requirements.
How much can I borrow?
Depending on your situation, you may be able to borrow:
- 85% of the property value: When you’re borrowing up to 85% of the purchase price, you may be able to qualify for interest rate discounts and waived Lenders Mortgage Insurance (LMI).
- 90% of the property value: Although many banks have limited the number of 90% LVR (Loan to Value Ratio) loans they approve, you may still be able to borrow the amount with the help of a non-bank lender.
- 95% of the property value: Borrowing 95% LVR for an investment property is normally suitable for people in a strong financial situation.
- 97% of the property value: You may be able to qualify for 97% LVR if you apply with a specialist lender. A 97% investment loan allows you to capitalise the cost of LMI on your loan, potentially saving thousands of dollars in upfront costs.
Call us on 1300 889 743 or complete our free online assessment form to speak with our brokers about applying for a mortgage today.
What property types are acceptable?
Not all properties are accepted by the banks. To be accepted by the banks, the property needs to meet certain lending criteria, such as:
- The property should be a standard unit, house, townhouse or land and construction.
- The living area should be greater than 50m2.
- The property should be in good condition.
- The property should be located in a high demand location.
You can refer to our property types page for more information on investment properties that lenders accept.
Do I qualify for an investment loan?
Investment loans are considered riskier than standard home loans.
As such, the approval criteria for investment loans is relatively more complicated, especially if the lender needs to consider negative gearing benefits to approve your serviceability (if you can afford the loan).
As a general rule, you need to be in a strong financial position to qualify.
Getting approved for an investment loan
You may be eligible to apply for an investment loan, provided that:
- You have 5% to 10% in genuine savings.
- You have equity in other properties, in case this isn’t your first investment property and you’re borrowing over 90% LVR.
- You have a great credit history and credit score.
- You have a stable employment.
If you want to know if you qualify for a home loan before you decide to use cash or mortgage, then speak with our brokers on 1300 889 743 or complete our free online assessment form.
Is this the right loan for me?
An investment loan is for people who want to invest in property but don’t have sufficient funds.
Investors are generally professionals who earn high taxable incomes and are in a very strong financial position.
Basically, a 95% investment loan is suitable for you if you’re well off financially and you’ve either learned about property investment or are already building your property portfolio.
If you’re in a poor financial position, an investment loan isn’t the right option for you as these loans are rather expensive with little or no return on your investment.
Give us a call on 1300 889 743 or fill in our free online assessment form to speak with one of our mortgage brokers about your options.
Cash or mortgage FAQs
What is negative gearing?
Negative gearing is when you borrow to invest in property then end up making a loss at the end of the year. This usually happens because your interest and running costs exceed your investment income. However, you’re allowed to claim the net loss as a tax deduction against your income.
As an investors, you can benefit from getting into the market early and increasing their investment income to cover costs.
This strategy is suitable for any investor earning a high taxable income as the holding costs of a property are generally outweighed by the capital gains and tax benefits.
What are the ongoing costs associated with property investing?
There are certain costs that you will need to pay once you own the property, such as:
- Rates: You may need to pay all council rates such as the water bill plus other taxes when buying a property.
- Maintenance costs: You’ll be liable for any cost of associated with repairs, replacements or regular property services such as plumbing, pest control and other facets of the property that require attention.
- Levies: If you’re investing in an apartment or strata title then you may be required to pay fees to the body corporate that uses the funds to cover the costs of repairs and maintenance.
- Interest: The interest on an investment loan, along with the principal amount is quite expensive.
- Insurance: It’s a smart idea to insure the property against any risk of damage, as well as fixtures or other contents.
- Agents’ fees: Where an agent is overseeing the property, you’ll be required to pay them fees for managing your property.
Did you know some of our lenders offer purchase cash backs for property buyers? This can help you offset some of the costs when buying a property.
You can refer to our investment loans page to find out more about these costs.
What can I use an investment loan for?
You can use an investment loan to invest in pretty much anything, as long as they’re legal and you can afford it.
Generally, you can use an investment loan to invest in property, shares, managed funds, options or business.
Still wondering if you want to buy with cash or mortgage?
You can call us on 1300 889 743 or complete our free online assessment form and speak with our brokers about which can be more beneficial, cash or mortgage.