Buying real estate outright means using your available savings to finance the entire price without resorting to a mortgage. For some buyers, this solution is synonymous with peace of mind.
Buying in cash: serenity or capital immobilization?
The psychological advantages of paying cash
Paying cash means:
Becoming an owner immediately
No debt or monthly payments
Avoiding the stress related to repaying a loan
Reducing additional costs (interest, borrower insurance)
Being more serene in the face of life's uncertainties
For some people, this peace of mind can be precious.
The limitations of a 100% cash purchase
But be careful, buying cash can also:
Lock all your savings in a single asset
Reduce your ability to seize other opportunities
Deprive you of the leverage effect of credit
Expose you to a lack of liquidity in case of a hardship
The leverage effect of credit: how does it work?
Resorting to a mortgage allows you to finance an important part of your purchase while preserving your savings. Thus, you benefit from what is called leverage.
Definition and principle of leverage
The leverage consists of using debt to increase your investment capacity and hoping for a return greater than the cost of borrowing. In real estate, this is particularly interesting when borrowing rates are low.
For the leverage effect to be interesting, the return on your investments must be higher than the total cost of the mortgage credit (interest, insurance, and other fees related to borrowing).
Buy outright or go into debt: which to choose according to your project?
Choosing between paying in cash or resorting to debt depends on your personal situation and the type of investment considered. Let's look at two practical cases: the primary residence and rental investment.
The primary residence
For the purchase of your primary residence, peace of mind often takes precedence. If you are close to retirement, without additional income, or if the idea of debt worries you, paying in cash can be reassuring.
On the other hand, if your financial situation is stable and you are ready to diversify your investments, resorting to credit can be wise.
Example: you invest in an apartment for €300,000.
Option 1: you pay in cash. You have little or no emergency savings left.
Option 2: you put down 20% (60,000 €) and borrow 240,000 € at 2%.
Rental investment
In the context of a rental investment, resorting to credit is generally recommended to fully benefit from the leverage effect. Indeed, your loan interest is deductible from your rental income: this reduces your taxable property income and optimizes your tax situation.
Use the bank's money to generate income through the rents received: that is the whole principle of leverage. If your rents cover all or part of your monthly payments, you are building a heritage without additional savings effort.
Conclusion
In summary, the choice between paying in cash or benefiting from leverage depends on your profile, your risk tolerance, and your goals. If you seek security and peace of mind, paying in cash is reassuring. But if you want to grow your wealth, diversify your investments, and optimize your tax situation, controlled debt through leverage remains a powerful strategy, especially for rental investment.
Before making a decision, always compare the cost of credit to the expected returns on your investments. And don't forget that good financial support can help you avoid many mistakes!
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