If you are looking at purchasing a house, you should weigh up the pros and cons of having a bond versus paying in cash for property. It is necessary to understand what each option involves, what the risks and benefits are and then to consider which option suits your needs for now and for the future. Remember, when you purchase property you are not making a small decision.
The way you choose to finance it, and the property that you choose, will affect your financial and personal future for many years to come.
What is a bond?
A bond is a debt instrument that companies, governments or organisation use to raise money. This type of security is, in effect, a contract between the creditor and the debtor that states that the bond will be paid back after a certain amount of time. There is also interest, at fixed intervals, that must be paid to the holder of the bond.
Unlike loans, bonds can be traded. Once you have bought a bond, you can sell it to a financial service provider in exchange for them financing your property. Very few bonds work on a fixed interest rate, but finding a bond that does is always your best bet for financing a property. This means that your interest rate will not be able to skyrocket and there will be no risk for you.
Paying in cash for a property
If you have enough capital in available assets (like stocks etc.) to purchase your house without a bond, mortgage or loan, you will avoid paying interest and you will therefore save money (known as a return).
Having a bond versus paying cash for property
You may immediately think that buying in cash is better for the following reasons:
- If the interest rate on a bond is 8%, for example, you will be saving that 8% by paying with cash.
- The home will be completely yours from the beginning rather than being owned by the bank.
- You will not have to worry about making payments each month to pay it off.
- If you sell or mortgage the property, you will receive the full amount of money it is worth.
However, you must consider the following:
- If you have rather put your available assets into stock and other investment ventures, would you make more money than you are saving by paying in cash?
- The property market is unpredictable and fluctuates regularly. If you were to try and sell it in the future, could you be sure that it would be worth more or even the same amount as what you paid for it?
Something else to take into consideration is the question of whether you are going to put all of your available assets into a property. What if you require the money for something else in the future? You could, of course, mortgage your home at a later date for money, but having a bit of capital tucked away as an investment you will probably feel more at ease.
To sum, if you can afford to buy a house in cash and still have some assets left over, it is definitely best to avoid getting into debt if you can. If you cannot, however, it is a good idea to look for a bond that has a fixed interest rate. Owning a property is a major asset and investment, providing you choose the correct one. Take your time, consider your needs now and in the future, research the market, the area and anything else that might affect the value of the property you are looking to purchase.
There are, of course, many other ways to finance your property without purchasing bonds or paying in cash. You could get a mortgage on a property that you already own to finance another property, you could get a loan from a financial service provider or you could use a combination of different routes to purchase the property.