Financing Your Property – Should You Opt for Cash or a Mortgage?
Investing in property is one of the biggest decisions many people will ever make in their lives with the type of financing chosen making the choice all the more important. Generally speaking, the two main methods for financing a property purchase is either cash or taking out a mortgage. Each option has its own benefits and drawbacks and neither is ‘better’ than the other. As with most financial choices, whether you opt to invest your own money or apply for a mortgage depends on your financial situation and needs.
For people with the capital to invest in property, opting for an all-cash purchase is a very attractive option for property ownership. Besides avoiding interest payments, myriad service fees on loans and additional costs, an all-cash purchase is an extremely powerful bargaining tool when purchasing a property, allowing you to secure a deeper discount with some clever negotiation. For those dabbling in property investment to turn a profit, cash purchases can offer faster turnaround times, whereas a mortgage would only hinder the process.
However, this does run into some issues. Investing a large amount of capital can tie up a substantial amount of your financial assets in a single property which is not advisable. Careful study and research is needed when investing to turn a profit on or ‘flipping’ properties lest changes in the market leave you running at a loss. Cash purchases are more advisable for older, more experienced and established investors.
A mortgage is a useful tool, especially for younger investors looking to get on to the property ladder. Though a long term commitment, it is generally easier to manage an investor’s cash flow as the payments are equally spread out. Indeed, choosing the right property and leasing it out can even let your property pay its own mortgage, particularly in areas where the property values are appreciating.
However, securing a mortgage is tougher these days, with most banks requiring a buyer to have a monthly income of AED 20,000 at the minimum in order to secure a mortgage. Interest rate hikes by the US Federal Reserve and the subsequent increase in the cost of credit also make mortgages more expensive now than they were in the last 5 years. In addition, UAE guidelines for mortgages limit the loan to value ratio for ready properties to 75% for expats and 50% for off plan, meaning that you will still need to have a sizeable amount of cash available to apply for a mortgage in the first place.
In the end, which option makes the most sense for you depends on your financial situation and home goals, as well as the current state of the market. Whether putting cash down or opting for a loan, the correct choice is the one that works best for your financial goals and needs and offers you the best return on your investment.
To know more or get additional investment insight and advice, contact Land Sterling’s Investment Advisory team at firstname.lastname@example.org or call us at +971 43 808 707.