House purchase - cash or mortgage?

[MrXxxx]

Just thought I would start a thread on this as a) we are now about to see a change of direction in the property market, and so b) some on here who have been waiting to buy [feels like forever] may be ready to 'pull the trigger'. So given the choice i.e. you have the cash/capital is it better to buy with cash outright OR to have a small [say 10% mortgage?

Be interesting to hear what those Dosbodders with experience consider to be the benefits/disadvantages of buying a property with a mortgage even when you can buy with cash. The ones I can think of immediately are as follows:

Advantages

1. Whist mortgaged the Bank/BS will hold the deeds free of charge.

2. Many mortgage providers provide a reduce cost [or 'free'] survey/valuation.

3. Depending on the interest rate the capital that isn't used in the house purchase can provide a better return on the stock market.

4. By doing 3. above you are diversifying your portfolio.

5. Less chance of missing something/buying a 'pup' as the bank/BS will provide a vested interest in this not occurring?

 

Disadvantages

1. You are incurring an interest cost, although it may be small.

2. You are at the whim of the provider who can decide when/if it wants to pay your mortgage back in full before the end of its term.

3. You will have a lower LTV and so may pay a higher interest rate [although I am not sure if this would plateau i.e. would there be much difference between having a 50% LTV vs a 10% LTV [you have 90% deposit].

4. You are not a 'cash buyer' and so may lose some negotiation power with prospective sellers.

5. Slower buying process?

5. As a non-cash buyer there is more hassle/paperwork in the conveyancing process.

 

Other factors to consider:

1. Would a bank/BS actually give you a small mortgage if they know you have sufficient capital to buy outright?

2. Would a bank/BS offer you a small mortgage if you are retire/semi-retired/unemployed?

3. In 1 and 2. above, would the rates [and number of providers] be as competitive as the normal mortgage offerings?

4. Implications for eligibility to state benefits.

[King Penda]

I’d pay cash but I’ve got a different set of circumstances and inflation will be nibbling at your cash in the bank

[With a crooked smile]

11 minutes ago, MrXxxx said:

You are not a 'cash buyer' and so may lose some negotiation power with prospective sellers.

5. Slower buying process?

5. As a non-cash buyer there is more hassle/paperwork in the conveyancing process.

Opinions will vary but I don't think any of these make a substantial difference. 

[Calcutta]

I've long worked towards being able to buy a house, but now prices are coming down and my money is going up, I'm seriously looking at the state of houses round here and thinking I might just rent out of choice. Fuck going thru all that bullshit just to spend 100s of grand on a liability.

My ideal location would be near my kids secondary school and the flats down there have a service charge of 3k a year anyway. The more it becomes a reality the more I'm starting to think I'd be better off renting even when I can afford to buy outright.

[Frank Hovis]

34 minutes ago, MrXxxx said:

1. Whist mortgaged the Bank/BS will hold the deeds free of charge.

 

That's gone now, all held electronically on the land registry.

I took out a mortgage on my first flat, rather than buying it outright, because I thought that the "friendly" building society would help me through the process. After all, I had seen their adverts saying how friendly and helpful they were.

Nope, they were no help whatsoever so I paid it off a couple of years later.

 

Generally I would say pay cash if you can but don't leave yourself short.  If you have £600k and are going to buy a £575k house then I would be inclined to take a £100k mortgage to leave myself with £125k, rather than £25k, just as a safety net against losing my job or big unexpected bills on the house cropping up (roof starts leaking and needs entirely replacing, say).

 

The big advantage IMHO is the one you pick up - avoiding the slow buying process.

Sellers want a cash buyer because it's quick and won't fall through, they will accept you offer in preference to the same or a slightly higher offer from someone needing to sort out a mortgage (this actually happened to me).

 

Also, as has been flagged up on another thread, the "Modern Method of Auction" means that you have a short timespan to complete the purchase after winning the auction and many people are unable to complete within this time (arranging mortgage, local authority searches, legal work) and as a consequence forfeit their often five figure deposit.

[Bear Hug]

I will have to buy with a mortgage to keep LISA top up. Part of its terms. 

[MrXxxx]

59 minutes ago, King Penda said:

I’d pay cash but I’ve got a different set of circumstances and inflation will be nibbling at your cash in the bank

But things are different up your way @KP...buying in cash up there just requires looking down the back of the sofa for the money! :-)))

[MrXxxx]

35 minutes ago, Calcutta said:

I've long worked towards being able to buy a house, but now prices are coming down and my money is going up, I'm seriously looking at the state of houses round here and thinking I might just rent out of choice. Fuck going thru all that bullshit just to spend 100s of grand on a liability.

My ideal location would be near my kids secondary school and the flats down there have a service charge of 3k a year anyway. The more it becomes a reality the more I'm starting to think I'd be better off renting even when I can afford to buy outright.

I know what you mean, especially now that the differential between mortgage payments and rental prices has reduced i.e. yield has got much lower...the only thing that does make a difference is the 'Security of Tenure' that you have with owning your own place, and after years of renting this aspect does become wearisome, so I can understand why people 'bite the bullet' and buy for a better quality of life/less stress.

[Calcutta]

33 minutes ago, MrXxxx said:

I know what you mean, especially now that the differential between mortgage payments and rental prices has reduced i.e. yield has got much lower...the only thing that does make a difference is the 'Security of Tenure' that you have with owning your own place, and after years of renting this aspect does become wearisome, so I can understand why people 'bite the bullet' and buy for a better quality of life/less stress.

That had always been my thinking. Get a house then we're safe and secure forever. But the more I think about it the more I think having funds liquid could be a lot more secure in the long run. 

Can't transfer a 3bed semi to a bank account in Singapore with my phone in the bog at work.

 

[MrXxxx]

15 minutes ago, Calcutta said:

That had always been my thinking. Get a house then we're safe and secure forever. But the more I think about it the more I think having funds liquid could be a lot more secure in the long run. 

Can't transfer a 3bed semi to a bank account in Singapore with my phone in the bog at work.

 

Agree, but forever thinking "Will I get a S21 this month" can wear on your mental health/well-being/relationships...perhaps a compromise i.e. a small/inexpensive home that could be 'abandoned' if the SHTF whilst still having a sizeable amount of liquid capital elsewhere...I am thinking here of previous example i.e. WW2 where those Jews who survived a) had a diversified capital base, and b) acted sooner rather than later to move both the majority of this [and themselves] to safety....they probably never got their house back but they still kept the majority of their capital AND a lifetime to spend it in!

[onlyme]

Another option is offset mortgage, you have the mortgage but also the savings to offset a proportion/majority of it depending on terms, turns the mortgage into a interest free savings / cheap loan product in effect whilst you pay it down with regular payments. Worked very well for us. Even better if self employed and income put into the pot until tax due.

Edited May 14, 2023 by onlyme

[MrXxxx]

51 minutes ago, onlyme said:

Another option is offset mortgage, you have the mortagge but also the savings to offset a proportion/majority of it depending on terms, turns the mortageg into a interest free savings / cheap loan product in effect whilst you pay it down with regular payments. Worked very well for us. Even better if self employed and income put into the pot until tax due.

Hi @onlyme, tell me a bit more...I assume that you pay down more when interest rates are high [like now...well those young enough not to have experienced the 1880/90s think they are high!], and then ease off/pay the minimum when they are low?....couple of questions:

1.Can you invest the savings in stocks and they can still be counted?...This then allows you to reduce your mortgage payments if the economy hit a rough patch and not be a forced/distressed seller of your stocks.

2. If 1. is not possible what is the benefit i.e. the capital in the savings account will be getting interest but this will be lower than the mortgage rate you are being charged i.e. there is no such thing as a 'free lunch'...or am I missing something, as it seems 'too good to be true'?

[One percent]

Can you still get those offset mortgages?  That might be worth exploring 

[onlyme]

Just now, MrXxxx said:

Hi @onlyme, tell me a bit more...I assume that you pay down more when interest rates are high [like now...well those young enough not to have experienced the 1880/90s think they are high!], and then ease off/pay the minimum when they are low?....couple of questions:

1.Can you invest the savings in stocks and they can still be counted?...This then allows you to reduce your mortgage payments if the economy hit a rough patch and not be a forced/distressed seller of your stocks.

2. If 1. is not possible what is the benefit i.e. the capital in the savings account will be getting interest but this will be lower than the mortgage rate you are being charged i.e. there is no such thing as a 'free lunch'...or am I missing something, as it seems 'too good to be true'?

IIRC the product we have is fixed payment part that chips away at the capital element and then you effectively pay the ongoing interest regulalrly on the difference between the outstanding mortgage sum and the balance of money help in the matching offset savings account.

1. no, only the savings actually in the account is set off the the interest payable on the remaingin balance. Hoever you can easily switch money in and out of the account if you want or need to use any of the savings elsewhere for investment / otherwise.

2. You pay interest on the net difference between amoutn owned and amount in the savings account, if say comparing to another savings account you are getting paid interest at the mortage rate and not having to pay tax on that interest.  Rates are probably not the most attractive compared to some on the market however.  

[onlyme]

1 minute ago, One percent said:

Can you still get those offset mortgages?  That might be worth exploring 

Yes,

https://www.coventryforintermediaries.co.uk/mortgages/product-guides/offset-product-guide.html

 

[MrXxxx]

9 minutes ago, onlyme said:

IIRC the product we have is fixed payment part that chips away at the capital element and then you effectively pay the ongoing interest regulalrly on the difference between the outstanding mortgage sum and the balance of money help in the matching offset savings account.

1. no, only the savings actually in the account is set off the the interest payable on the remaingin balance. Hoever you can easily switch money in and out of the account if you want or need to use any of the savings elsewhere for investment / otherwise.

2. You pay interest on the net difference between amoutn owned and amount in the savings account, if say comparing to another savings account you are getting paid interest at the mortage rate and not having to pay tax on that interest.  Rates are probably not the most attractive compared to some on the market however.  

OK, I 'see' how it works now...it effectively take a repayment mortgage and splits the two components i.e. 1. Interest on loan outstanding, 2. Payment of Capital.

Your point 1.

Is taking the place of the deposit, yet unlike a deposit that is paid at the time of starting the mortgage [and so is inflexible/fixed], with this product you can start with the same deposit [say 10%] and 'pull back' some of it at a later date if you so wish [i.e. take 5%, leaving 5%, so moving your LTV from 90% to 95%]. I assume there are restrictions on how much you have to leave in the saving to get the same mortgage rate?..so here what you could do [as I intimated at previously] is take out some capital/deposit and place it in shares when the mortgage rates drop [I assume its variable rates?], thus getting a better return on capital. The only 'danger' here is that if your stocks go 'puff' then you lose out.

 

Your point 2.

You are not disadvantaged as I propose in my last post as basically you are 'getting' the equivalent mortgage rate by 'offsetting' the capital in the savings account against the mortgage 'account'....so not 'wasting' potential returns on a 'rainy day'/just in case separate saving account with a bank/BS.

 

Somewhere though [i assume the initial mortgage rate] you will be paying for this flexibility when comparing like-with-like 'vanilla' vs an 'offset' mortgage with the same proportional LTV.

[Wight Flight]

2 hours ago, MrXxxx said:

Agree, but forever thinking "Will I get a S21 this month" can wear on your mental health/well-being/relationships...perhaps a compromise i.e. a small/inexpensive home that could be 'abandoned' if the SHTF whilst still having a sizeable amount of liquid capital elsewhere...I am thinking here of previous example i.e. WW2 where those Jews who survived a) had a diversified capital base, and b) acted sooner rather than later to move both the majority of this [and themselves] to safety....they probably never got their house back but they still kept the majority of their capital AND a lifetime to spend it in!

The alternative is to work with your landlord.

i have been lucky to negotiate a five year term and then a three year extension in the past.

Currently i am on a 12 month term but i negotiate the renewal six months in advance.

A decent landlord should be very happy with this.

[Sasquatch]

We took a much larger mortgage than we needed two years ago when we bought our house. Freed up some capital which we've put to good use and we can easily afford the monthly payments.

Saying that, we bagged a 1.49% 7 year fix so it was a bit of a no brainer. Probably wouldn't do the same now based on current mortgage rates.

[onlyme]

13 minutes ago, MrXxxx said:

OK, I 'see' how it works now...it effectively take a repayment mortgage and splits the two components i.e. 1. Interest on loan outstanding, 2. Payment of Capital.

Your point 1.

Is taking the place of the deposit, yet unlike a deposit that is paid at the time of starting the mortgage [and so is inflexible/fixed], with this product you can start with the same deposit [say 10%] and 'pull back' some of it at a later date if you so wish [i.e. take 5%, leaving 5%, so moving your LTV from 90% to 95%]. I assume there are restrictions on how much you have to leave in the saving to get the same mortgage rate?..so here what you could do [as I intimated at previously] is take out some capital/deposit and place it in shares when the mortgage rates drop [I assume its variable rates?], thus getting a better return on capital. The only 'danger' here is that if your stocks go 'puff' then you lose out.

 

Your point 2.

You are not disadvantaged as I propose in my last post as basically you are 'getting' the equivalent mortgage rate by 'offsetting' the capital in the savings account against the mortgage 'account'....so not 'wasting' potential returns on a 'rainy day'/just in case separate saving account with a bank/BS.

 

Somewhere though [i assume the initial mortgage rate] you will be paying for this flexibility when comparing like-with-like 'vanilla' vs an 'offset' mortgage with the same proportional LTV.

1. Deposit is separate, that gets paid initially anyway so you are only offsetting say against an 80% mortage, you are not borrowing any more only effectively borrwing back your money if you ave previously oerpaid into the savings part.

2. Yes, you effectively are getting notional tax free interest at the prevailing mortgage rate, now that rate may or may not be competitive in the market. 

Think in this case linked to SVR rates.

https://www.coventrybuildingsociety.co.uk/member/mortgages/homeowners/new-customers/remortgage.html

 

[UmBongo]

I'm in the process of buying. If I could have afforded to buy this place outright I would. Cash is king, as the old saying goes. 

Instead I'll be buying with a 48% deposit. Got the mortgage via a broker. The lender isn't charging me an arrangement fee. Perhaps they would have done if the LTV was higher. 

Edited May 14, 2023 by UmBongo
A word

[Frank Hovis]

9 minutes ago, UmBongo said:

I'm in the process of buying. If I could have afforded to buy this place outright I would. Cash is king, as the old saying goes. 

Instead I'll be buying with a 48% deposit. Got the mortgage via a broker. The lender isn't charging me an arrangement fee. Perhaps they would have done if the LTV was lower. 

 

Congratualtions on finding somewhere!

[UmBongo]

7 minutes ago, Frank Hovis said:

 

Congratualtions on finding somewhere!

Thanks Frank. I have a dedicated thread for it:

U Bongo's property search.

I ought to update it. 

[Lightly Toasted]

6 hours ago, MrXxxx said:

Just thought I would start a thread on this as a) we are now about to see a change of direction in the property market, and so b) some on here who have been waiting to buy [feels like forever] may be ready to 'pull the trigger'. So given the choice i.e. you have the cash/capital is it better to buy with cash outright OR to have a small [say 10% mortgage?

Be interesting to hear what those Dosbodders with experience consider to be the benefits/disadvantages of buying a property with a mortgage even when you can buy with cash. The ones I can think of immediately are as follows:

Advantages

1. Whist mortgaged the Bank/BS will hold the deeds free of charge.

2. Many mortgage providers provide a reduce cost [or 'free'] survey/valuation.

3. Depending on the interest rate the capital that isn't used in the house purchase can provide a better return on the stock market.

4. By doing 3. above you are diversifying your portfolio.

5. Less chance of missing something/buying a 'pup' as the bank/BS will provide a vested interest in this not occurring?

 

Disadvantages

1. You are incurring an interest cost, although it may be small.

2. You are at the whim of the provider who can decide when/if it wants to pay your mortgage back in full before the end of its term.

3. You will have a lower LTV and so may pay a higher interest rate [although I am not sure if this would plateau i.e. would there be much difference between having a 50% LTV vs a 10% LTV [you have 90% deposit].

4. You are not a 'cash buyer' and so may lose some negotiation power with prospective sellers.

5. Slower buying process?

5. As a non-cash buyer there is more hassle/paperwork in the conveyancing process.

 

Other factors to consider:

1. Would a bank/BS actually give you a small mortgage if they know you have sufficient capital to buy outright?

2. Would a bank/BS offer you a small mortgage if you are retire/semi-retired/unemployed?

3. In 1 and 2. above, would the rates [and number of providers] be as competitive as the normal mortgage offerings?

4. Implications for eligibility to state benefits.

Advantages

1. Whist mortgaged the Bank/BS will hold the deeds free of charge.
Held digitally by LR now -- https://hmlandregistry.blog.gov.uk/2018/02/19/title-deeds/

2. Many mortgage providers provide a reduce cost [or 'free'] survey/valuation.
My experience with a lender-mandated (and appointed) surveyor was that they were crap, they didn't even bother to change all the boilerplate. Big surveying company, easy money for ticking boxes.

3. Depending on the interest rate the capital that isn't used in the house purchase can provide a better return on the stock market.
True

4. By doing 3. above you are diversifying your portfolio.
True

5. Less chance of missing something/buying a 'pup' as the bank/BS will provide a vested interest in this not occurring?
I think you'll still be on the hook, and you're probably can't even sue the [free/comes-with-the-deal] surveyor who "missed something" since you presumably are not their client.

 

Disadvantages

1. You are incurring an interest cost, although it may be small.
True

2. You are at the whim of the provider who can decide when/if it wants to pay your mortgage back in full before the end of its term.
Don't think they can do this, in general -- the contract will be for a specified period.

3. You will have a lower LTV and so may pay a higher interest rate [although I am not sure if this would plateau i.e. would there be much difference between having a 50% LTV vs a 10% LTV [you have 90% deposit].
Surely small mortgage = better LTV = better rate?

4. You are not a 'cash buyer' and so may lose some negotiation power with prospective sellers.
True

5. Slower buying process?
True

5. As a non-cash buyer there is more hassle/paperwork in the conveyancing process.
True

[MrXxxx]

3 hours ago, Wight Flight said:

The alternative is to work with your landlord.

i have been lucky to negotiate a five year term and then a three year extension in the past.

Currently i am on a 12 month term but i negotiate the renewal six months in advance.

A decent landlord should be very happy with this.

Agree, but generally I have found most Landlords [and I have had quite a few over the years to make a valid judgement] to be unreliable at best, and dishonest at worse. I appreciate they have an investment [and so want to make a profit], but I have found most to be very greedy, whilst it suits them they are all 'smiles and sincerity', but at the earliest opportunity they would 'sell their Grandmother' for a little extra profit. I appreciate with a AST they are committed to the term, but if they want things to change will easily 'forget' or delay repairs, and become a bloody nuisance by they "Oh I was just passing by and though I would pop-in BS".

[Wight Flight]

2 minutes ago, MrXxxx said:

Agree, but generally I have found most Landlords [and I have had quite a few over the years to make a valid judgement] to be unreliable at best, and dishonest at worse. I appreciate they have an investment [and so want to make a profit], but I have found most to be very greedy, whilst it suits them they are all 'smiles and sincerity', but at the earliest opportunity they would 'sell their Grandmother' for a little extra profit. I appreciate with a AST they are committed to the term, but if they want things to change will easily 'forget' or delay repairs, and become a bloody nuisance by they "Oh I was just passing by and though I would pop-in BS".

Mine have all been what they would call accidental landlords.

I think they are easier to train than the career ones.