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The pros and cons of CASH vs LOAN when buying your dream home

In this series of “Buying Real Estate in Sri Lanka,” you are about to discover “The pros and cons of CASH vs LOAN when buying your dream home”. If you haven’t read the previous article “Are you ready to start saving for your down payment?” click here. You can also find the entire series on “Buyers Guide”.

‘Buyer beware!’… You may have heard of this expression; specially in the context of a risky and high-value purchase. Here in Sri Lanka, the term becomes even more valid if you are in the process of purchasing a house. However, the purpose of this blog is not to educate you on the many details you need to worry about regarding the physical condition of the building, or the neighbourhood it’s located in. Rather, our intent is to give you a better understanding of the existing implications in making your home purchase through either cash or a loan; ultimately helping you to make an informed decision on which alternative to go with…

So, if you are thinking of purchasing your dream home, and can’t decide between buying it for cash, or on a loan, keep reading!

THE CASH OPTION: The obvious choice?

CASH OPTION

Should you have the disposable funds to buy your dream house as an outright purchase for cash, chances are you would lean towards this option because; a) you are not in debt following the purchase; b) none of the hassles involved in obtaining a loan are a concern; and c) the transaction concludes relatively faster. Let’s move in for a more objective look at these points, shall we?

a) Being debt-free feels great, but… unforeseen expenses and emergencies never call you months ahead to prepare for. So, even if you have the cash to spare, it’s always advisable to consider the savings you will be left with before making a decision.

b) Nobody likes red tape and cumbersome processes. All of that is there in abundance when you want to obtain a loan. Going for the outright cash option will mean that you DON’T have to go through any of those inconveniences.

c) Close the deal faster. Cash has that power. Sellers always like to deal with cash buyers because they know the money is right at their fingertips. This enthusiasm for closing the sale, simultaneously improves your ability for negotiating a better rate as well.

So, based on the above, when is it ever the better option to go for a loan when buying a house? We’ll tell you in a bit, and it’s not only because you don’t have the necessary funds in cash…

THE LOAN OPTION

Buying a house in Sri Lanka, comes with hefty price tags that most people can’t afford if they were to make the investment solely in cash. It is for this reason that loans and credit have become a fundamental determinant for progressing lifestyles.

But, aside from the obvious stated above, a loan could be interpreted as a very sensible mean for buying a house.

The key word in discussion is ‘liquidity’. When you spend a huge wad of cash on a house, it compromises your financial stability considerably. True, you do end up paying a whole lot more than you borrowed. However, when you consider the time value of money, whatever excess you are paying over a period of time can be worth it, relative to the risk of dispensing a large portion of your liquid funds.

Planned out and spread out – the repayment of a loan can be done at your pace. Once you commit whatever cash you can, a loan can be sorted out for the rest of the value. That way, you maintain a healthy level of personal liquidity without falling into a situation of stress-inducing indebtedness.

Now, be it cash, or loan, there are 3 key universal factors you need to consider which are applicable to both options;

 key universal factors to consider when buying your home

  1. The strain on your finances – Can you continue to maintain the same living standards as before?
  2. Ease of transaction – How efficient will the selected option make the buying process?
  3. Unique benefits (or disadvantages) – Each option will have a set of unique benefits that cannot be provided by the other. Such benefits might determine which option you pick depending on your financial situation.

Based on the above factors, we have summarized all the pros and cons relating to both options in the table below;

 CashLoan
ProsConsProsCons
Financial StrainCompletely free from debt.The immediate compromise on liquidity is significant.Ability to conserve cash reserves and ease short-term financial strain.The final payback will have a significant interest component built-in.
Transaction EaseDeals can be concluded instantaneously.Concerns of security can arise if seller requests hard cash.Funds are disbursed to the seller methodically with no involvement required from the buyer.Loans can take time to process, drawing out the overall time period of the transaction.
Unique benefits / disadvantagesGreater negotiating power against the seller.Wealth generating ability is reduced if invested funds are pulled out.Flexibility to structure repayments according to existing financial means, with greater savings assured as future income grows.Restricts your overall borrowing capacity.

 

We hope our blog got you off to an informative start towards making that decision of choosing either cash or a loan as the financing option for your dream home purchase. Get in touch with Kelsey Homes for any assistance, the premier housing developer in Sri Lanka with over 35 years of housing excellence!!!

Read our next article from the Buyers guide series “What are the requirements for a housing loan?” click here.

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