Buying a House with Cash Vs Getting a Mortgage

house with pound coins around it

If you are looking to buy a property and you have a substantial amount of money saved, you may be wondering whether to buy a house with cash or secure a mortgage instead. It can be difficult to decide if buying with cash is a good option, especially when there are mortgage products that could prove beneficial if you have savings.

This guide explains the differences between buying a house with cash and getting a mortgage. As you might imagine there are distinct advantages and disadvantages to both.

Let’s explore buying a house with cash vs getting a mortgage further.

Can You Buy a House without a Mortgage?

Yes, you can buy a house with cash. However, there are normally additional challenges you will encounter when buying property with existing savings.

Some sellers request cash buyers only in the hope of a quick sale and avoiding property chains. For cash buyers, these properties are normally marketed below market value to attract as much attention as possible.

You can also buy properties at auction. Auctioned properties tend to be cheaper to buy on average and you might be able to snap up a bargain. When banks repossess properties, they normally sell them at auction to recover the costs they have incurred in quick time frame.

What is a Cash Buyer?

A cash buyer is an individual (or couple) who have substantial savings and do not require a mortgage to buy a property.

To be considered a cash buyer by vendors (sellers) you will need to demonstrate that you have the funds readily available to buy a property. Normally this will be ascertained by providing statements of your current or savings accounts.

You should be aware, a cash buyer looking to buy a property with actual cash will be a red flag to estate agents and vendors. They are likely to be concerned about the source of the money, for money laundering checks, and why you have not used a bank account.

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Pros and Cons of Using Cash to Buy a House

There are four main advantages to buying a property with cash:

  • You will avoid a mortgage and interest payments
  • No ongoing monthly costs as you will own the property outright
  • In some cases, you will be able to buy properties below market value (especially during recessions when vendors are more distressed)
  • You will be able to complete on the purchase a little quicker because you forego a mortgage application.

However, there are disadvantages when buying a house with cash:

  • You will need to show where the money has come from
  • You will have to rely on your own diligence to decide if the property is in good condition (all mortgage lenders insist on a valuation before issuing an offer)
  • You will need to have the money readily available

Source of the Cash

Whenever you purchase a property with cash there will automatically be a small red flag triggered for money laundering. Estate agents will conduct anti-money laundering (AML) checks to ensure the funds have been accrued legitimately.

You will need to show the source of any money you are intending to use to purchase the property. AML checks are strict, and it is not unheard of for bank accounts and assets to be completely frozen until the source of funds has been verified.

Responsibility for Verifying the Condition of the Property

If you buy a property outright, you are responsible for organising any valuation prior to exchanging contracts. It is strongly advisable to conduct a valuation before you exchange contracts as there may be some structural issues with the property that you are unaware of. In most cases, it is advisable to carry out a valuation prior to making an offer, as it may influence the sum of your offering.

Whereas, if you proceed with a mortgage application, a basic valuation will be mandatory prior to the mortgage offer being issued. This should provide a sense of security as the lender will not wish to lend against an unsuitable property.

Cash Funds Need to Be Readily Available

In most cases, people do not leave large sums of money in a current or savings account because the interest rates are typically lower than returns you would expect from investments.

However, you will need to have the funds in your account ready for the AML check and purchase of the property. You will not be able to provide statements of investment accounts or pension funds for buying a property with cash in most cases. Therefore, those accounts would need to be liquidated which could damage the return on investment for the account.

Pros and Cons of Getting a Mortgage

A traditional mortgage product is almost always disadvantageous if you have cash to buy a property. This is because the interest you will pay borrowing the money will far outstrip any interest you would accumulate on your cash funds.

With that said, there are bespoke mortgage products that combine your ability to buy with cash with a mortgage product. These are commonly known as offset mortgages.

What is an Offset Mortgage?

An offset mortgage allows you to deposit the amount of money you want to use to buy the property with a designated lender. That money then sits in a ringfenced account and the amount you have deposited offsets against the interest payments.

Offset mortgages are valuable in these circumstances as they are low risk products for lenders and allow borrowers to borrow further if required for renovation work. All the while your initial deposit amount is offsetting interest payments.

There are other benefits with offset mortgages such as tax perks and the ability to withdraw money from your original deposit at any time. Offset mortgages are flexible mortgage products specifically designed for cash rich buyers.

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Can You Buy a House with Cash and Get a Mortgage Later?

Yes, you can apply for a remortgage on a property that you have bought outright. Lenders typically require you to have owned your property for at least 6 months before they can consider a remortgage application. However, there are a few lenders currently in the market that may accept an immediate application.

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Being able to buy a property outright without a mortgage is desirable for many people in society but it is not without risk.

Mortgage lenders understand that buying a property with cash is not always ideal and have created flexible mortgage solutions that can make your purchase tax efficient and reduce your exposure to risk.

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Brokerage. Boon Brokers provides fee free mortgage advice.

Contact Boon Brokers to discuss your next property purchase and find out which products are available to you today.

Gerard BoonB.A. (Hons), CeMAP, CeRER

Gerard is a co-founder and partner of Boon Brokers. Having studied many areas of financial services at the University of Leeds, and following completion of his CeMAP and CeRER qualifications, Gerard has acquired a vast knowledge of the mortgage, insurance and equity release industry.