In Dubai, it is estimated that over 60% of real estate transactions involve all cash rather than a mortgage. While this is a much higher percentage than the global trend, home buyers who can afford to pay cash for a property should consider the pros and cons of doing so versus taking a home loan.
The Advantages of Paying All Cash
Sellers will prefer to deal with you. You are considered a more attractive buyer if you are paying in cash; sellers know that applying for a home loan and getting an approval can be very time-consuming. In addition, the bank can turn you down last minute, which means the seller will have to find another buyer. In a real estate market where there are more buyers than sellers, paying all cash will help you stand out from the competition.
You are in a better bargaining position. Sellers always prefer to receive their money sooner rather than later. This means that if you have the cash to make an immediate deal, you might be able to negotiate a discount.
Avoid the headache of getting a home loan. Since late 2009, banks have become stricter in their lending criteria; as a result, potential borrowers need to have a strong credit profile and must provide an extensive list of documentation. This means you should apply for a mortgage from multiple banks to have the best chance of being approved.
No mortgage payments. Having an outstanding loan will always cause some level of stress. Paying all cash means you don’t have to worry about making the monthly loan payment or worry about all the clauses in your mortgage agreement (for more information, read our article “Check These Clauses in Your Mortgage Agreement”).
Unfortunately, the majority of home buyers can not afford to make such a large purchase without a loan. Even if you can however, there are some advantages to using financing.
Why a Home Loan is Better than Cash
More financial flexibility. Paying cash for a home means you are tying up a lot of your savings in one asset, which can be a risky move if the real estate market suffers. However, by taking a mortgage, you can invest your savings in other assets and diversify your investments.
Lower returns from your investment. A very simple example is if you buy an apartment for AED 750,000 using cash, and you sell it for AED 1,000,000 after a year, your return will be 33%. However, if you took a loan and only made a downpayment of 25% (AED 187,500), your return will be 133%.
Less liquidity. If you ever have a financial emergency, you can instantly withdraw cash from your bank account, or sell stocks you own. However, it takes more time to turn your home into cash since you will have to wait for a buyer and close the sales process. In addition, you may be forced to sell your home at an unfavorable price.
Paying for a home in cash may make sense, especially in certain real estate markets such as the UAE. However, you should always consider the potential downsides as well.