When it comes to purchasing residential properties, the quantum of the property values is no laughing matter. To buy a house, you incur a substantial liability that may put a strain on your financial resources or you may lose liquidity which may as well come in handy for meeting any urgent financial requirements. The means to purchase a residential property either comes from taking a home loan from a lender or by using your cash reserves or liquid assets to complete the transaction.
Either way, undertaking a financial transaction on this scale cannot be done without planning. Be it using a loan to purchase a residential property or paying all cash for the property, each has its respective advantages and disadvantages. This article seeks to explain certain concepts regarding the purchase of a residential property using your cash for the transaction.
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What are the advantages of paying cash for a house?
Be it any industry, in India, the seller loves a person who purchases something using hard cash. What is not there to appreciate about such a buyer?
- As a buyer who intends to purchase a house using cash, you are given preference by a seller over a buyer who plans on purchasing a house using a loan. Applying for a loan is a time-consuming process and is likely to delay the sale of a property. A buyer who purchases the property using cash can close the deal in a shorter period.
- As a buyer of property using cash, you have a better bargaining position with the seller when it comes to the terms of the sale. The seller is bound to understand that he is in a better position to accept payment in the form of ready cash as soon as possible. Funds from loans do not materialize until the lender approves the loan. There is a good chance that the funds would remain blocked until the approval processes of the loan applications are completed.
- The buyer who decides to use loan funds for purchasing a house has to face the hassles of applying to banks, compare their lending options on offer, prepare the application, present documentation and so on. The buyer with cash does not need to face these hassles as he simply has to proceed with the transaction.
- The buyer who does not avail loans to purchase a house does not need to keep track of interest payments and the other related costs to be incurred. Home loan tenures can extend for decades and keeping track of these payments monthly is tedious work. Over and above that, many a time, a buyer/borrower may face an income fall in the future but is still saddled with the loan and the monthly outflows towards its repayment.
If there are advantages, there are bound to be disadvantages of using cash to purchase property also like:
- Cash is a liquid asset and has several uses like meeting unforeseen expenses, fulfilling short-term financial objectives, making investments, paying off lenders, etc. A house is an immovable asset that is kept for long-term usage. By using your cash reserves to purchase a house, you are effectively blocking your funds in a long-term immovable asset which cannot be used for any other purpose other than residential purposes. You could use the cash to make investments in diverse stocks, shares, mutual funds, etc.
- Cash allows for mobility. If you ever wanted to liquify your holdings quickly to seize a lucrative investment opportunity, you can simply sell your short-term investments like shares, stocks, and other securities that you used cash to purchase and use the funds received to invest where you want to. However, if your cash reserves are tied in residential property, it is difficult to quickly sell your property and obtain cash for it. It is easy to change a liquid asset into a non-liquid asset, but the reverse is difficult.
- There is also the case of tax deductions. When it comes to purchasing a house using home loan funds, you get a standard deduction up to Rs 2 lakh on the home loan interest paid under the head “Income from house property” under Section 24 of the Income Tax Act, 1961. This is only if you derive no income from your residential property and it is self-occupied. You can also claim deduction towards payment towards principal amount under Section 80C of the same Act. However, for the above purposes, property purchased by using cash qualifies for no deductions under the law of the land.
- Some investments yield greater returns than real estate. If you were to invest your money in stock options that yielded higher returns than the returns yielded on the price appreciation of real estate, you would simply make more money. However, by blocking your funds in real estate, which is but one asset, you lose the opportunity of making these investments. This problem does not arise from using home loan funds, for you are free then to use your cash reserves however you see fit.
Do you need title insurance if you pay cash for a house?
The Real Estate (Regulation and Development) Act, 2016 has provided for the purchase of title insurance by developers for all new and ongoing property developments registered with the regulatory body.
- Title Insurance is a measure taken by buyers to protect themselves from the risks related to the transfer of title and ownership in the property. It usually involves a single payment of a premium which covers the entire duration of the insurance policy.
- The buyers may, later on, incur the costs related to the policy after it shifts to them from the developer.
- No matter how thorough the due diligence conducted by buyers in the matter of prior titles held in the property when it comes to defects in title, the interests of buyers in the property are bound to be jeopardized.
In properties owned by several prior owners, access to the original mother deed, the document that speaks of the original ownership rights to the property is difficult. A defect in title is also passed down along with the title and hence, a buyer should take all such measures possible to mitigate the risks of encountering such a defect. By having title insurance, a buyer who encounters the risk of such a title defect can pass off such a risk to the insurer.
It does not matter if the property is purchased using home loan funds or cash, title defects are unbiased when they affect the ownership titles of buyers. Hence, it is best to protect yourself from such risk and take title insurance even though it increases the cost of purchase.
Residential property is an immovable asset that is usually held for an extended period. Using cash to purchase such an asset is accompanied by its advantages and disadvantages. For a potential buyer having a surplus of cash reserves idly lying around, purchasing a house using these cash reserves is a good option. On the other hand, for a buyer who has a shortfall of cash, a home loan could be the best option.
Factors like interest payments on a loan, the opportunity cost of cash, the consequences of using either cash or loan in the purchase of a house on the financial status of a buyer, so on and so forth have to be factored in to make an informed decision. And no matter which alternative is used to purchase a house, to protect the newly purchased ownership title, you need to take title insurance to mitigate the risks of encountering title defects.
A smart buyer is one who takes the circumstances prior, during and after the purchase of the house into consideration. It is s/he who enjoys the ownership of the residential property for an extended period.