Buying a Property in Cash vs Mortgage

Deciding between buying a property in cash or through a mortgage is a hard choice for anyone looking to invest in Dubai’s real estate market. This decision impacts your financial standing and aligns with your personal investment strategies and goals. Cash purchases offer the simplicity of outright ownership and can be more attractive to sellers, potentially leading to faster transactions and discounts. However, they require significant capital upfront. On the other hand, opting for a mortgage provides financial leverage and preserves liquidity, though it incurs interest costs and demands a stable income for repayments.

Buying a Property in Cash in Dubai

In Dubai’s real estate market, buying a property in cash is an option that appeals to those who prefer a straightforward transaction. This method bypasses the complexities of loan procurement and offers a level of financial freedom that is unmatched by mortgage-based purchases. Now, let’s delve into the advantages of this approach.

Cash VS. Mortgage Investment Property Differences  

1. Savings

The most notable benefit of buying a property in cash is its substantial savings compared to a mortgage. Mortgages come with various additional costs, with interest being the most significant. Over the tenure of a home loan, the total amount paid can far exceed the original price of the property. Cash purchases also avoid other expenses typically associated with mortgages, such as bank fees, processing fees, and closing costs. By opting for an all-cash transaction, you effectively sidestep these additional charges, leading to significant long-term savings. Moreover, this approach eliminates the potential financial stress and pitfalls of overbidding or neglecting property inspections, which can escalate costs in a mortgage arrangement.

2. Leveraging Negotiation Strength

A significant advantage of buying a house with cash in Dubai is the increased negotiating power. Cash buyers often have the upper hand in negotiations as they are fully aware of their budget constraints and can bargain for a more favourable price. This strength arises from the simplicity and certainty that cash transactions bring to the table. In contrast, those opting for a mortgage first need to qualify for it (especially a foreign mortgage), which involves extensive documentation and navigating through bureaucratic processes. There’s also the uncertainty of whether the mortgage will be approved for the desired amount. A cash purchase circumvents these hurdles, providing a smoother and more direct path to property ownership.

3. Time Efficiency

Another benefit of cash purchases is the reduced time involved in the transaction. Deals involving cash are usually straightforward, involving direct negotiations with the seller or the real estate agent, free from the involvement of banks or home finance companies in UAE. On the other hand, opting for a mortgage introduces a more tedious process, including bank formalities and approvals, which can significantly extend the timeline of the property transaction. Therefore, buying a home with cash saves money and valuable time.

Understanding Common Costs in Property Purchase

• Purchase Price

Regardless of the purchase method, the initial unit price remains constant whether you buy with cash or through a mortgage.

• Reservation Fee

A reservation fee, amounting to 5% of the purchase price, is required upon applying to purchase the unit. This fee is identical for both cash and mortgage purchases.

• Legal Fees

Legal fees are unavoidable in property transactions, usually around £850. This expense is the same for cash and mortgage buyers. It’s essential to account for all such expenses in your financial planning to accurately calculate the Return on Investment (ROI), including legal fees, stamp duty, and other outlays.

• Deposit

Prosperity Wealth offers an option to pay the 30% deposit in 24 monthly instalments without interest. This option applies to both cash and mortgage buyers as a 2-year deposit. At this stage, calculate your total deposit expenditure, including the 5% reservation fee and the 30% deposit, payable in 24 monthly instalments. This arrangement helps spread the cost over two years, making it more manageable while retaining control of your funds during construction.

• Stamp Duty

Stamp Duty is another cost that remains consistent regardless of the payment method. The Stamp Duty is calculated at the higher rate. First-time buyers might pay less, but investment buyers typically face this higher rate, whether purchasing in cash or with a mortgage.

Breaking Down the Different Costs

• Remaining Balance of the Purchase Price

After accounting for the initial costs, you’re left with the final 65% of the purchase price to be paid upon the project’s completion. The approach to this payment differs significantly between cash and mortgage purchases. The remaining balance is due at completion for a cash purchase, representing the remaining 65% of the full purchase price. As a cash buyer, you’ve already covered the 5% reservation fee, the 30% deposit over the construction period, and additional costs like stamp duty and legal fees. The final step is paying this remaining balance in a lump sum. In contrast, if you’re opting for a mortgage, the balance due at project completion is effectively zero; this is because you would have secured a 65% buy-to-let, interest-only mortgage to cover this portion of the cost.

• Total Financial Commitment

Calculating the total outlay reveals the full financial commitment for both purchasing methods. For a cash buyer, the total includes the entire purchase price, along with legal fees and stamp duty. On the other hand, for a mortgage buyer, the total outlay is considerably lower at the outset, covering the 5% reservation fee, the 30% deposit paid in instalments, legal fees, and stamp duty. The mortgage covers the remaining balance, which is not included in this initial outlay calculation.

Is It Better to Buy a House in Cash or Mortgage?

The decision between buying a property in cash or through a mortgage in Dubai depends on individual circumstances, financial stability, and future plans. Here are some factors to consider:

• Reasons for Purchasing Property: Are you looking for a home to live in, or is it an investment?
• Type of Employment: Do you have a stable job or a fluctuating income?
• Age: Younger buyers might prefer the longer tenure of a mortgage, while older investors might opt for cash to ensure quick transactions.
• Finances: Assess your current financial situation and future prospects.
• Future Plans: Consider your long-term goals and how a property purchase fits into them.

For instance, a young professional with a stable job might find a mortgage more suitable due to its manageable payments and longer tenure. On the other hand, a middle-aged investor may prefer cash purchases for quicker turnover and better returns. Ultimately, whether to buy a property through cash or mortgage in Dubai should be a decision based on what is most financially advantageous for you at your current life stage and after following the steps of buying property in Dubai.