Buying A House In Cash vs A Mortgage

Owning a property outright with no mortgage is a dream for a lot of people. Most people who buy property in the UK, for residential purposes or for investment purposes such as buy-to-lets, will need to take out a mortgage loan. With the average price of a property in the UK being over £270,000 right now, chances are that most people won’t have enough liquid cash to buy without help from a bank or building society. If you are lucky enough to either have enough money to buy in cash, why bother going through the process of getting a mortgage and taking out debt that you don’t really need? But surprisingly to some, a lot of wealthy people are taking out mortgages on properties, even when they can afford to buy them outright.

Earlier this year, the daily mail (in its classic style) sensationally revealed that Adele had taken out a whopping $38 million mortgage on her new $58 million house in Los Angeles with mortgage payments of $200,000 a month. Now obviously this is an extreme example of wealthy people having a mortgage but lots of people classed as high net worth individuals choose to have mortgages on properties, and not just on their homes either. Here are some of the main reasons why wealthy people get mortgages.

Why Do People Buy In Cash?

It might seem like a silly question but it is an extremely important one and a very relevant one today. In recent months, the prospect of getting a mortgage has become less and less appealing for people, mostly due to misinformation peddled by the media. All the reports coming from the global news outlets are pretty bleak, let’s face it. The combination of the country entering an economic recession, banks hiking interest rates on all borrowing to discourage overspending, and the public generally feeling the pinch due to an increased cost of living.

So, if it is financially feasible for you, why would you go through the trouble of organising a mortgage with higher than normal interest rates and increasingly stringent lending policies? A lot of people opt to buy in cash because of the perceived ease and convenience of it all. Buying a property, whether it’s for you to live in or to rent out without a mortgage can save people money. Chances are that if you are able to buy a property without a mortgage, you might not be too concerned about money however, if you are worried about extra costs associated with a mortgage then this can be a major reason.

Will You Avoid Fees If You Buy A Property In Cash?

If you get a mortgage, you could be liable to the following extra fees:

1. Mortgage broker fees – Essential fees that mortgage brokers will charge for their advice, submitting your mortgage application, liaising with estate agents and solicitors, and chasing your mortgage application to ensure that it is offered as soon as possible for you. Different brokers charge different fees depending on the level of the mortgage, the complexity of the mortgage and the area that your mortgage is arranged.
2. Mortgage product fee – For the more competitive products and rates, most mortgage lenders will charge a product fee for you to gain access. This encourages healthy competition for the products and also ensures that there isn’t over use of the product. Generally mortgage product fees are about £1,000 but could be less and could be more. However, fortunately most lenders will not need you to pay this fee upfront or separately and will allow you to add the fee to your mortgage balance…as long as you can afford it.
3. Survey/Valuation Fee – Most mortgage lenders when considering lending to you will insist on a property valuation being carried out. This is to ensure that the property you are buying is worth what the seller is saying and that the lender won’t lose out on money if they have to sell the property in the event of a repossession. You can arrange your own valuation if you like however lenders normally have their own trusted and recommended solicitor so you can go for this option. In most cases, the valuation will incur a cost to you. This can be anywhere from a few hundred pounds to a few thousand depending on the complexity of the valuation. Some mortgage products will offer free valuations.
4. Solicitor fees – With any property purchase there are legal hoops that you must jump through to ensure that your money is safe and everything is above board legally. When purchasing with a mortgage, solicitors will check things like mortgage offers, when mortgage funds are going to be released and to who they are going to and deposit sources. Of course, if you are buying in cash then a lot of these things are irrelevant. You will still most likely need to arrange for a solicitor to check over other elements of the purchase, but the fee will be significantly reduced. Getting a solicitor representation when buying with a mortgage can cost several thousand pounds. Again, some products come with free legals so you may not need to pay anything.

Why Get A Mortgage When You Can Buy In Cash?

So we have looked at the reasons why someone might purchase a property outright rather than going through the mortgage process. But why would anyone get a mortgage if they can afford not to? The reality is that getting a mortgage can be very beneficial to you (yes, even in 2023!). In the remainder of this blog post we will look at several reasons why getting a mortgage and could ultimately benefit you more than spending all your money on purchasing a home.

If you were considering buying your new property outright but change your mind after reading this post, we are more than happy to talk you through your options and and see if we can help. Details of the best way to contact our advisors can be found at the bottom of the blog. Now, let’s get into the benefits of getting a mortgage over buying in cash.

Flexibility

Taking out a mortgage on a property means that you can often have a lot more flexibility with their money and the property. So, for example, someone could purchase a £1 million+ property in cash outright but that means that they no longer have that cash. So, if they need to do some development works to the property, convert a building into flats, re-landscape the garden, completely tear out the interior and bring in Laurence Llewelyn-Bowen to create the perfect paradise, they may be strapped for cash.

Also, if the property is bought to be flipped, it could take a while for the property to be ready to sell or could even sit on the market for 6 months which means your £1 million investment is stuck in a property. Wealthy people will often take out mortgages so that they have the flexibility to put some of their money towards the actual purchase of a property and borrow the rest, leaving a large chunk of the money that they would have spent buying is cash.

Ability to invest in other things

Wealthy people often have more than one income stream. It is quite rare that they rely on one source of income, so that’s why mortgages come in handy. As already mentioned, purchasing a property outright in cash will take away a large amount of liquid money, and even if you can comfortably afford to do so, a lot of wealthy people want to have the ability to spread their money out in different investments. So, rather than spending £1 Million in cash on one property, people will often spend a couple of hundred thousand on a property, mortgage the rest and use the money they have saved to invest in businesses, other property, and pretty much anything they want to create another income stream.

Borrowing can be cheap (not necessarily at the moment but things WILL get better)

Finally, borrowing CAN be cheap. As we all know, mortgage rates are currently quite high due to various inflation issues. However, in recent history borrowing has been cheap. Taking out a loan for a large amount of money and then paying it back per month for a wealthy person has been quite appealing in the past and hasn’t cost them very much in interest to do.

With things like buy-to-let investments, the rent received per month from tenants covers the cost of the mortgage per month so that the borrow doesn’t even need to think about being able to keep up with the payments. Interest rates are higher at the moment, so borrowing is nowhere near as cheap however rates will come back down eventually and borrowing money as a high-net-worth individual is still very beneficial.

In 2023, although we still face a tough couple of years economically, we predict that mortgages will start to go back to a good place. Unfortunately it is unlikely that we will see rates below 2% again for a while, but in the grand scheme of things this is very normal. Rates have been unnaturally low for a few years and have now returned to a more normal level. In 2023, as long as there aren’t any other spanners thrown in the works, it looks like rates will continue to come down and be generally between 3% and 4% with potentially lower than 3% rates on the horizon in the next 12 to 18 months.

This means that in 2023 there will hopefully be more appetite for lending from the banks and building societies and subsequently more competitive and attractive products and rates entering the market. It is certainly an exciting time for mortgages and the property market in general.

If you or anyone else you know is interested in making the most of your money with a mortgage, please give our specialist high-net-worth team a call today to see what might be possible.