Cash vs Mortgage: What Makes Sense For A Luxury Home Purchase?
One of the more fascinating trends in the luxury real estate market is that cash buyers become the majority when homes exceed $1 million. Research from Realtor displays that 36.4% of homes priced between $750,000 and $1 million are bought with cash, but this increases to 53.4% in the $1 million to $5 million range - and almost 60% for super-luxury homes in the $ 10 million+ bracket.
This research looked at the Miami real estate market specifically, largely because it has the highest concentration of luxury homes in the country. But what we’re interested in is why cash is so popular when you enter the luxury end of real estate - and whether or not mortgages still have a part to play.
Why Cash Rules The Luxury Real Estate Market
The easiest explanation behind such a high proportion of cash buyers is that the target market for luxury properties is not the same as the one for more “regular” homes. Once a property exceeds $1 million, it tends to be aimed at the ultra-wealthy, which usually includes:
People with a high net worth
Rich individuals or investment companies from overseas
As a result, these people aren’t afraid to spend a lot of money in one go. Individuals with a high net worth are going to have a lot of cash to play around with, so they see no issue in making cash purchases for real estate. After all, we’re talking about millionaires - and possibly the odd billionaire - so buying a home isn't as big of a deal to them.
International buyers are also interesting because they may prefer to pay in cash from a more practical standpoint. It’s harder for an individual to gain the necessary financing to buy a property overseas. Their local lenders may see it as a risk, while lenders within the foreign market they want to enter might not approve loans to non-residents. This means that paying in cash is often the only way someone from overseas can purchase a luxury property here.
The Benefits Of Cash Purchases
A cash purchase typically carries a few main benefits:
No mortgage rates
Faster closing times
More likely to have bids accepted
In fact, if you spoke to most people, they’d probably say that they would like to buy a house in cash instead of getting a mortgage, purely because it simplifies everything. Cash buyers own the home, and it’s not secured against any loans - and then they don’t have to worry about monthly repayments. It makes sense, but that begs the question: are mortgages ever worth it in the luxury market?
Why Mortgages Still Make Sense For Luxury Home Buyers
The thing about luxury real estate is that mortgages are not exactly the same as they are in the traditional market. You end up needing to apply for a jumbo mortgage, which is any mortgage on a property that’s valued above $832,750 - as per the latest conforming threshold. Generally speaking, jumbo mortgages for individuals making residential purchases can be offered up to $10 million.
You are borrowing a lot of money, and the loan still works like any other mortgage in that you’ll have to make repayments plus interest. What’s more likely to happen with jumbo loans is that the interest rates are offered with fixed-rate fees and better structures - likely because the people who qualify for these loans are still ultra-wealthy, and this makes them low-risk candidates for lenders.
But the question remains: if you have enough money to qualify for a jumbo mortgage, why would you opt for one instead of paying in cash?
Well, it primarily comes down to these two benefits:
Retain more of your assets
Open up additional investment opportunities
Imagine someone with $10 million worth of liquid assets, but they identify a house for sale at $5 million. Theoretically speaking, they have more than enough money to buy that home in cash - but it would mean parting ways with half of their assets in one go. Some people don’t mind that, but others see jumbo mortgages as a better solution because they can retain a larger proportion of their assets. Even if that individual put a $2 million down payment on their loan, they now have $8 million in working capital instead of just $5 million.
And this brings us to the investment side of the answer: you can use your “saved” capital to invest in more assets. Instead of buying one home for $5 million, the person could purchase two or three with a mortgage. They’ll still have the money to make mortgage repayments, but they now own three luxury properties that could be rented out or flipped for a profit.
The rental aspect is really intriguing, especially in places like Miami where there is a big demand for luxury rental properties. Some people prefer to rent to avoid paying property taxes and HOA costs - and you also have lots of young people with a lot of money who want to live with friends in a big house. It means the prospect of turning to a mortgage instead of cash can open the way for some very profitable real estate rental investments.
Which Is Better: Cash or Mortgages?
There is no true winner in this debate; the “best” approach is whatever suits your specific wants and needs. People with loads of working capital and a desire to simply own and live in a luxury home may find it easier to pay in cash - especially if it doesn’t impact their ability to invest in other things.
On the other side of the spectrum, jumbo mortgages make so much sense from an investment and spreading your wealth standpoint. Why go all in on a cash purchase when a mortgage helps you hold onto more working capital that you can then use to diversify your investment portfolio?
It’s horses for courses, and what most individuals realize is that the best thing to do is to speak with a financial advisor. They’ll help you understand which option makes the most sense and will prevent you from suffering any financial strife in the future.