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Nook Blog - Why A Home Loan Can Be Financially Better Than Paying Cash For A Property

Why A Home Loan Can Be Financially Better Than Paying Cash For A Property

Why A Home Loan Can Be Financially Better Than Paying Cash For A Property

Tessa A – July 4, 2022

Are you in the market for a new home? If so, you're likely feeling both excited and nervous about the prospect of making such a big purchase.

It's not a decision to take lightly – after all, your home will usually be the biggest investment you'll ever make. So making a well-informed financial decision is vitally important.

And there are a lot of things to consider when purchasing a property.

How much can you afford? What is the best location for you and your family? And should you pay cash or take out a home loan?

Both options have their pro’s and con’s, but in many cases, taking out a home loan is the more financially savvy decision.

Here's why:

A Home Loan Allows You To Diversify Your Investments

One of the most significant advantages of a home loan is that it allows you to keep your cash invested elsewhere.

You put all of your eggs in one basket when you pay cash for a property. If the property value deteriorates, you could lose money.

But if you have a home loan, your investment is spread out over several different assets: the house itself and any other stocks or investments you may have. This diversification can help protect you from sudden market fluctuations.

Additionally, should something happen and you need to sell the property, you’ll have the cash available to do so without having to liquidate other investments.

A Home Loan Gives You More Flexibility

Paying cash for a property means that you have to shell out the total purchase price upfront. This can be a huge strain on your finances, and it may not leave you with any room for unexpected expenses.

On the other hand, a home loan gives you more flexibility in your budget and allows you to cover unexpected costs as they arise.

With a home loan, you can choose to make smaller monthly payments or pay off the loan early without any penalties, depending on which bank is ultimately chosen for the home loan.

This can be helpful if you experience financial difficulties down the road or want to save on interest charges.

A Home Loan Allows You to Build Equity

Another advantage of taking out a home loan is that it can help you build equity in your property.

When you make payments on a home loan, a portion of each payment goes towards the principal or the amount you borrowed. This means that you'll gradually own more and more of your home.

On the other hand, if you pay cash for your home, you won’t build any equity until you sell the property.

A Home Loan May Offer A Better Alternative For Your Cash

One of the most important considerations is the interest rate of the home loan versus the rate of return you could earn from alternative investments.

When you take out a home loan to buy property, you will repay the home loan at a certain interest rate.

If you used your cash on hand to invest in alternative investments that produced a higher rate of return than the interest rate paid for the home loan, then you would be financially better off.

The Verdict

Weighing all of these factors, it’s clear that taking out a home loan instead of paying cash could be the better financial decision when purchasing a property.

A home loan allows you to invest your cash elsewhere in alternative investments, avoids having ‘all your eggs in the one basket’, and gives you more flexibility.

Check out our website for all the latest information on home loans and get started on your journey to homeownership.