Buying a House with Cash: A Guide

Buying a house in cash is an attractive option for anyone who can afford it.

It brings many advantages and only a few disadvantages to buyers and to people selling to a cash buyer.

Read on to learn more about how to do it.

Cash buying definition

cash buyer definition: /kaʃ ˈbʌɪə/ Noun A person or organisation with the funds to buy property without a mortgage. They have 100% of the selling price ready to spend.

In property, cash buying means buying a home outright without a mortgage.

Selling to cash buyers brings homeowners several advantages, including quicker and more certain sales. This in turn brings the buyers advantages (see below).

In this context, buying with cash doesn’t mean physical cash is handed over.

(After all, the average house price in the UK is around £290,000. This would fill an entire suitcase… It’s also extremely rare because of UK money laundering rules.)

Types of cash buyers

One-off or occasional buyers

Many cash buyers are simply individuals in a financial position to afford to buy in cash.

They might own more than one property, be downsizing, recently have received a cash injection (from inheritance, another property sale, etc.), or be buying a property for someone else.

Individual investors

Investors look to buy homes in cash to be able to seize opportunities quickly.

They then either renovate or simply sell on the home later for a profit (what’s known as flipping a property).

Large property buying specialists

Large property buying companies (such as We Buy Any Home) buy multiple properties with cash.

They often have multiple employees handling the different stages of the selling process. This helps them achieve a scale individual investors are unable to achieve.

Advantages and disadvantages of being a cash buyer

Advantages

Sellers’ preferences

Buying a house in cash makes you a more attractive buyer to the person selling.

This is because there are benefits to selling to cash buyers. So, sellers often prefer to sell to cash buys over regular buyers (who are relying on mortgages).

Lower selling price

You may even get them to agree on a reduced price. Many cash buyers pay less than regular buyers because of the speed and certainty of their buying.

More flexible sale time frame

Buying a house with cash removes (or reduces) the property chain you are in and your need to wait for mortgage approval.

This usually gives buyers and sellers more flexibility on the time frame for completing a sale and moving home.

Disadvantages

Loss of liquidity

Cash buying reduces or even removes liquidity for many buyers.

Until your cash funds recover, you have less – or no – ability to make other large purchases, including in property.

This might make you vulnerable in emergency situations.

Investing potential reduction

Loss of liquidity in turn reduces your investing potential. By contrast, getting a mortgage can keep these opportunities open to you.

Many mortgages come with extra advantages, such as low interest and reduced rates for insurance.

Cash buyer checks

Certain procedures must be carried out to prove that cash sales are legitimate. This is like any other method of paying.

For example, cash buyers will need to show:

Proof of ID
Proof of address.

They won’t need to show proof of income, but they will need to provide details about the source of your funds. More on this below.

Proof of funds

Cash buyers must provide the seller’s estate agent with proof of funds. This can usually be done through bank statements.

These estate agents might also ask for details about the source of funds. This is because they need to comply with money laundering rules.

Source of funds checks

Source of funds checks are essential for money laundering checks.

There are three common ways for sellers (including cash buyers) to prove the source of funds:

Savings account statements
Confirmation of gifted money
Evidence from estate executors of inheritance money.

The more detail and supporting evidence sellers provide, the better.

Not all countries or methods are accepted

There might be certain countries of origin or methods of transfer that won’t be accepted.

Some providers and destination countries may set transfer limits, too.

**Buying a house in cash and then getting a mortgage**

Buying a house in cash and then getting a mortgage afterwards is possible. This is commonly known as ‘delayed financing’.

When you take out a mortgage after paying in cash, you unlock some of the equity in the house.

It helps you to close the deal quickly, which reduces stress and hassle.

It also means you can capitalise quickly if – for example – interest rates are low, but you suspect they will rise soon.

You can also fend off competition and negotiate for a better selling price.

When you apply for a mortgage after buying a house in cash, the bank will determine what they think it is worth.

There is no guarantee that they will value your property at the exact figure that you did. If the appraised value is lower than your purchase price, it can hamper the financial positives of your deal.

Applying for a mortgage can be a tedious process. But when you use delayed financing, you’ll be forced to complete the application again.

Your costs of buying a house will increase if you pay a solicitor to handle this process.

Banks’ lending to cash buyers

For a bank to give you a mortgage after buying a house in cash, there are certain conditions you’ll have to meet. These can vary for each organisation, for example:

Some banks want you to live there for at least 6 months before doing this.
Some might ask you to register the Title Deeds before you apply.

But some banks don’t enforce many rules at all. Speak to them directly for clarification.

Other loans for buying a home in cash

Personal loans

You can use a personal loan to buy a house.

However, it’s not generally recommended because personal loans typically have higher interest rates and shorter repayment terms than mortgages.

Other alternatives to mortgages include:

Lines of credit

A line of credit is a type of loan that allows borrowers to borrow up to a pre-approved limit.

It’s like a credit card but with lower interest rates.

And like personal loans, lines of credit come from banks or other financial institutions.

These are not mortgages, so they can provide the funds needed to purchase a cash-only house.

However, it’s essential to know that these loans typically have higher interest rates and shorter terms than traditional mortgages.

In other words, you may have steep monthly fees.

Hard money loan

Another option worth considering is a hard money loan.

Hard money lenders are typically private companies or individuals specialising in providing property investors with short-term loans.

The property itself will secure the loan. However, like personal bank loans, these loans have higher interest rates and fees than traditional mortgages.

They are generally used by real estate agents who need to raise cash quickly to purchase properties sold at a discount.

Cash buying and taxes

On the surface, cash buyingdoesn’t affect taxes. You shouldn’t pay any more or less taxes when buying a property because you’re paying in cash.

However, buying a house in cash often implies other circumstances that might affect taxes. Examples include:

If you’ll rent the property to a tenant
You’re buying the house under a company name
You are a registered social landlord.

Stamp Duty Land Tax (SDLT)

Stamp duty land tax is a tax on properties over a certain price in the UK.

(This is also known as Land and Buildings Transaction Tax in Scotland and Land Transaction Tax in Wales).

When you buy a second property in the UK (which is possible if you’re a cash buyer), there may be extra stamp duty due. This is usually 3%.

Different stamp duty rates

There are also special stamp duty rates if you are any of the following:

Corporate bodies
Buying six or more residential properties in one go
Companies and trusts buying residential property.

For example, stamp duty is 15% on residential properties that cost more than £500,000 when bought by certain corporate bodies or ‘non-natural persons’.

If this applies, you’ll need to research how the rates change.

For example, Stamp Duty Land Tax (SDLT) is charged at 17% on residential properties costing more than £500,000 bought by certain corporate bodies or ‘non-natural persons’.

Potential reliefs

But there may be relief available in some situations, such as:

Using the house in a property rental business
The house is occupied by employees of the buyer
It’s a farmhouse
The house is part of a trade, which involves making it open to the public.

Visit the UK government website for more details about corporate bodies’ varied stamp duty rates and surcharges.

Capital Gains Tax

Whether you’re a cash buyer or not, you do not pay capital gains tax when buying a house.

It is only due when you sell property (if applicable). But if you have just sold another property to enable you to be a cash buyer, then capital gains tax might be due.

You’ll need to look out for this tax when the time eventually comes to sell.

You may get tax relief if the property is a business asset. Otherwise, you’ll pay on the amount that the house has increased in value while you owned it.

Income Tax on rental earnings

As a cash buyer, it is possible that you are purchasing the house so you can let it out to someone else.

This allows you to generate income from the property. Just keep in mind that these earnings are subject to income tax.

If the house is in your name, earnings that go directly to you will be subject to income tax.

But if a company holds the property, and you take a dividend from the profits, then different tax rates apply.

Speak to an expert tax adviser for guidance on this.

Council Tax

You must pay council tax when you buy a property in the UK, regardless of whether you’re a cash buyer or not.

Your location and the valuation band of your house will impact how much you have to pay. Empty properties are exempt from council tax in some circumstances.

Speak to an expert or a council member for guidance on finding out your council tax obligations.

Value Added Tax (VAT) on services

If you buy a house in cash because you are a limited company that is Value Added Tax (VAT) registered, you may be able to claim back VAT on some of your expenses.

This is if you can demonstrate that it is a legitimate business cost.

Speak to your solicitor or estate agent about their pricing methods. Find out if it includes VAT.

The same could apply to removal companies.

In your quarterly VAT returns, you might be able to get a percentage of these outgoings back. Make sure you get a receipt from all the professionals you work with.