If I can afford to buy in cash, is there any advantage to buying with a mortgage right now? - Edward Allan in The Sunday Times - Boodle Hatfield

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23 Apr 2024

If I can afford to buy in cash, is there any advantage to buying with a mortgage right now? – Edward Allan in The Sunday Times

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Residential Property Partner, Edward Allan provides expert commentary in The Sunday Times ‘Home Help’ segment looking at the following scenario...

Q: I’m currently looking at buying a property in the country and am fortunately in the position to cash buy — just. This option is more tempting than usual given the sky-high interest rates, but I do still wonder if it’s worth taking out a mortgage. If I could manage the cost with monthly payments rather than buying outright, I would have more cash to invest elsewhere in the short term, but is this foolish given current interest rates? And what should I be considering in terms of tax?

Edward replies: Wealthy buyers frequently borrowed when rates were historically low to preserve liquidity. From a tax perspective, a mortgage is not deductible against the capital gain on sale. However, if the house is your main residence and you are a UK resident taxpayer, then you can claim main residence relief, exempting any gain.
If this will be your second home, then you should consider whether to elect this property as your main residence. If it is your second home, you will also have an additional 3 per cent stamp duty charge which can only be refunded if you are replacing your main home and sell your existing home within three years.
For inheritance tax (IHT) purposes, a mortgage will be a deduction against the value of the property. The debt can reduce the net value of your assets. However, if you subsequently use mortgaged funds to invest elsewhere, either through remortgaging your property or using equity release, then their value will be an asset of your estate, so the mortgage deduction may not have an IHT benefit. The mortgage interest will not be deductible against rental income in future. Historically it was possible to use the interest as a deduction, but this is no longer the case.
For competitive properties the commercial reality is that cash buyers are preferred because they can act speedily. For a seller, when the buyer is using a mortgage, there is also the risk of a downvaluation and the additional requirements of a lender which need to be considered.
Lenders may also require separate legal representation when the loan exceeds a certain level and some private banks insist on having their own solicitors. You should start the mortgage process early and carefully manage the seller’s expectations on timings.
The decision about taking a mortgage is an important financial one and you should seek advice from a regulated financial adviser.

Read the full article in The Sunday Times here.

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